GiR 


THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 


HENRY  RAND  HATFIELD 
MEMORIAL  COLLECTION 

PRESENTED  BY 

FRIENDS  IN  THE  ACCOUNTING 

PROFESSION 


i 


HENRY  R.  HATFIELD 

2695  LE  CONTE  AVENUE 
BERKELEY     CALIFORNIA 


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Rowe's 
Bookkeeping  and  Accountancy 

Complete  Text 

Presenting  the  art  of  bookkeeping  in  accordance 

with  the  principles  of  modern 

accountancy 


By 
HARRY  M.  ROWE,  Ph.D. 

Author  of  "Commercial  and  Industrial  Bookkeeping,,"  "Business  and 
Office  Practice,"  "Business  Bookkeeping  and  Practice,"  Etc. 


SCRIPT  BY  C.  P.  ZANER 


BALTIMORE 
THE  H.  M.  ROWE  COMPANY 

EDUCATIONAL  PUBLISHERS 


COLORS  USED  IN  THE  RULINGS  IN  THIS 

BOOK  AND  ACCOMPANYING 

BLANK  BOOKS. 

Science  has  determined  that  the  combination  of 
colors  least  trying  to  the  eye  are  neutral  shades  of 
brown  and  green,  and  that  the  most  trying  are  red 
and  blue.  For  this  reason  the  brown  and  green  colors 
used  in  the  rulings  in  this  book  and  the  blunk  books 
accompanying  it  have  been  substituted  for  the  red 
and  blue  usually  found  in  books  of  this  character. 


Copyright  1910 
Copyright  1911 
Copyright  1918 

BY 

Harry  M.  Rowe 

Entered  in  Stationers'  Hall 

London,  1910 
Entered  in  Stationers'  Hall 

London,  1911 
BY  Harbt  M.  Rowe 


Copyright  protects  a'.l  the  copyrightable  com- 
ponent parts  of  this  work  and  prohibits  all  unlaw- 
ful use  of  Its  composition,  illu^^trations,  methods, 
etc.  Infringers  will  be  punished  to  the  full  extent 
of  the  law. 


HF5G1S 

R& 
/f/8 


PREFACE 


"Bookkeeping  and  Accountancy"  is  intended  to  impart  a  training  in  the  art 
of  bookkeeping  that  is  based  upon  the  fundamental  principk's  of  accountancy. 
It  is  intended  for  students  of  the  age  usually  found  in  commercial  schools,  public 
and  private,  who  are  ready  to  begin  a  study  of  the  subject.  The  completion 
of  the  full  course  of  stud}^  provided  will  not  only  qualify  for  a  high  degree  of 
proficiency  in  the  art  of  bookkeeping,  but  it  will  also  lead  up  to  a  very  thorough 
understanding  of  the  general  principles  and  practices  of  accountancy. 

While  for  many  years  I  have  closely  followed  the  development  of  account- 
ancy as  a  science,  particularly  in  its  economic  relations,  I  am  no  longer  a  prac- 
ticing accountant,  therefore,  I  have  presented  accountancy  in  this  work  as  I 
have  found  it,  particularly  as  reflected  in  the  practical  experience  of  many  eminent 
accountants  with  whom  I  have  consulted. 

My  principal  task  has  been  to  simplify  the  presentation  of  accountancy  so  that 
it  may  be  understood  by  the  average  commercial  student,  and  to  prepare  book- 
keeping sets  in  various  lines  of  business  that  would  illustrate  the  application  of 
its  principles. 

I  have  found  that  in  reclassifying  accounts  to  conform  with  the  theory  and 
practice  of  accountancy,  the  art  of  bookkeeping  has  been  made  easier  to  learn 
and  easier  to  teach,  rather  than  more  difficult.  True  science  simplifies  any 
subject  of  which  it  treats,  and  accountancy  is  the  true  science  of  bookkeeping. 

Five  distinct  subjects  are  included: — the  fundamental  and  elementary  prin- 
ciples of  accountancy,  the  art  of  bookkeeping  as  applied  in  various  lines  of  business, 
business  methods  and  practices,  and  office  methods  and  practices. 

The  following  are  some  of  the  features  of  particular  interest: 

1.  For  students  who  are  beginning,  teachers  can  have  their  choice  of  (1)  the 
account,  or  skeleton  ledger  method,  (2)  the  theory  method,  using  transactions  stated 
in  the  form  of  memorandums,  or  (3)  the  illustrated  theprj'  method,  in  which  the 
business  papers  received  and  issued  are  used  in  connection  with  the  printed  text, 
either  for  purely  illustrative  purposes,  or  as  data  from  which  records  are  to  be 
made  in  the  various  books.  The  "Subject  matter  is  the  same,  except  that  it  is 
presented  in  different  order  in  each  method. 

2.  The  transactions  are  classified  and  entered  in  the  books  in  which  they 
properly  belong,  from  the  start.  Purchases,  sales,  notes  and  acceptances,  cash 
receipts  and  payments,  etc.,  are  entered  directly  in  their  respective  books,  from 
which  the  proper  accounts  in  the  ledger  are  debited  and  credited. 

3.  Various  price  lists  are  provided  with  each  set,  which  may  be  used,  if 
desired. 


fwif^i  i  PQc; 


IV  PREFACE 

4.  The  transactions  of  each  set  are  confined  to  those  usually  found  in  the 
particular  line  of  business  illustrated.  All  unnecessary  and  unbusinesslike  trans- 
actions are  omitted. 

5.  The  transactions  of  each  set  and  the  accounts  growing  out  of  them  are 
classified  according  to  the  principles  and  rules  of  modern  accountancy. 

6.  The  business  methods  commonly  followed  in  the  various  fines  of  business 
illustrated  in  the  different  sets  are  fully  explained  in  connection  with  the  transac- 
tions to  which  they  apply. 

7.  The  trading  and  profit  and  loss  statements,  statements  of  resources  and 
liabilities,  and  the  other  statements,  analysis  sheets,  etc.,  required  in  connection 
with  each  set  conform  strictly  to  the  estabUshed  forms  of  these  statements  em- 
ployed by  accountants. 

8.  The  business  papers  and  forms  are  selections  from  the  best  lithography 
produced,  many  of  them  showing  unique  and  practical  ideas  in  design  and  arrange- 
ment to  facilitate  and  safeguard  business  transactions. 

9.  Ledger  closings,  the  gouping  of  accounts,  the  use  of  controlling  accounts, 
the  analysis  of  accounts,  and  the  preparation  of  various  supplementary  and  sup- 
porting statements  are  given  special  attention  and  thorough  treatment. 

10.  Manufacturing  accounts  and  statements,  corporation  accounts,  the 
voucher  system  of  accounts,  branch  store,  agency,  and  other  special  accounts 
are  fully  explained  and  illustrated. 

11.  Cost  accounting,  cost  records  and  systems  are  given  ample  treatment 
for  the  elementary  student. 

12.  The  principles,  rules  and  practices  of  accountancy  are  fully  set  forth 
throughout  the  text  and  its  accompanying  budgets. 

13.  Supplementary  drills,  that  feature  which  proved  to  be  so  valuable  in  my 
older  bookkeeping  publications,  are  provided  wherever  needed. 

I  wish  to  acknowledge  the  valuable  services  rendered  in  the  preparation  of 
manuscript  and  the  reading  of  the  proof  by  my  good  friend,  B.  P.  Leister,  C.  P.  A., 
a  former  pupil,  who  was  for  many  years  a  most  successful  teacher  of  the  commer- 
cial branches,  and  who  is  now  in  full  practice  as  a  certified  pubfic  accountant.  I 
also  wish  to  acknowledge  my  obligation  to  the  many  other  accountants  who  have 
assisted  me  in  various  ways  in  the  preparation  of  this  book,  and  who  have  responded 
so  freely  to  my  requests  for  suggestions  and  criticisms. 

The  Author. 

Baltimore,  Md 

June  10,  1910. 


CONTENTS 

Definitions 1 

Accounts 3 

Debiting  and  Crediting  Accounts 4 

Classification  of  Debit  and  Credit  Items 5 

Personal  Accounts 5 

Ownership  Accounts 16 

Proprietor's  and  Partner's  Capital  Accounts 17 

Relationship  Between  the  Owner  and  the  Business 2! 

Proprietor  s  and  Partner's  Personal  Accounts 22 

Notes  Receivable  and  Notes  Payable 24 

Notes  Receivable  Account 25 

Notes  Payable  Account 31 

Cash  Account •^' 

Merchandise  Accounts 42 

Principal  and  Subsidiary  Trading  Accounts 42 

Purchases  Account— A  Principal  Trading  Account 43 

Sales  Account— A  Principal  Trading  Account 49 

Inventory  Accounts 53 

Subsidiary  Trading  Accounts 56 

Freight 56 

"Freight  In"  Account 57 

Warehouse  Accounts 58 

Warehouse  Supplies  Account 58 

Warehouse  Labor  Account 60 

Rebates  and  Allowances 62 

Merchandise  Discounts 63 

Purchase  Discounts  Account 64 

Sales  Discounts  Account 66 

The  Trading  Statement 69 

Profit  and  Loss  Accounts 79 

Current  Expenses  and  Incomes:  Use  and  Service  Accounts 81 

Selling  Expense  Accounts 84 

Outgoing  Freight,  Express  Drayage,  etc 85 

Delivery  Expense  A  ccount 87 

Administration  Expense  Account 88 

General  Expense  Accounts 91 

Insurance  Account 94 

Insurance  Expense  Account 98 

Interest  and  Discount  Account 100 

Pioperty  Investment  Expense  and  Income  Accounts 104 

Real  Estate 166 

The  Investment  Account— Real  Estate 106 

Real  Estate  Expense  and  Income  Accounts 108 


Vl  CONTENTS 

Property  Investment  Expense  and  Income  Acc-ounts— Continued 

Furniture  and  Fixtures  Account 112 

Repairs  and  Renewals  Account 114 

Delivery  Equipment  Account 117 

Profit  and  Loss  Statement 118 

Distribution  of  Undivided  Profits 127 

Journalizing,  Posting,  Checking  Trial  Balances,  etc 130 

Trial  Balances,  Inventories,  Statements,  etc 131 

Closing  the  Books,  Statements,  etc 137 

Combined  Trading  and  Profit  and  Loss  Statement 142 

Statement  of  Resources  and  Liabilities 145 

Analysis  Sheets 147 

Explanation  of  Other  Accounts 154 

Shipments  and  Consignments 154 

Shipment  Accounts 155 

Consignment  Accounts 157 

Commission  Accounts 160  . 

Branch  Store  Accounts 161 

Briefer  Explanations  of  Accounts 164 

Business  Papers ^^^ 

Account  Books 1^6 

Cash  Book 187 

Purchases  Book 187 

Sales  Book ^ 187 

Notes  and  Acceptance  Books ■ ■  ■  •  •  •   188 

The  Journal— Other  Books— The  Ledger ,189 

Closing  the  Ledger •   1^" 

Errors  in  Trial  Balances 1"^ 

Corporations 1^^ 

Difference  Between  Partnerships  and  Corporations 195 

Corporation  Accounts '  ■  ' 

Muaufacturing  Accounts 200 

Cost  Accounting 202 

Advantages  of  a  Cost  System 209 

Wage  Systems -12 

Distribution  of  Indirect  Expenses 213 

The  Department  Method  of  Manufacturing  Accounts 221 

Cost  Method  of  Manufacturing  Accounts 223 

Manufacturing  Statements 2^" 

Forms  of  Cost  Records,  Reports,  etc 254 

The  Voucher  System 257 


BOOKKEEPING  AND  ACCOUNTANCY 

1.  Bookkeeping.  The  art  of  classifying  and  recording  business  transactions 
and  facts  systematically  is  called  bookkeeping. 

2.  Accountancy  is  that  branch  of  practical  science  which  treats  of  the  methods 
of  classifying  and  recording  business  transactions  and  accounts  so  that  the  facts 
they  exhibit  shall  be  shown  in  tlunr  proper  relations,  expressed  in  terms  that  will 
most  fully  provide  the  information  necessary  to  successful  business  and  financial 
administration. 

3.  A  business  transaction  is  an  exchange  of  something  for  something  between 
persons;  that  is,  one  person  receives  something  of  value  from  another  for  which  he 
gives  something  of  equivalent  value  in  exchange. 

4.  Value  is  represented  in  anything  that  has  worth,  purchasing  power,  or  utility 
such  as  property,  merchandise,  money,  uses,  and  services. 

5.  As    to  the  time  of  transfer  by  each  party,  transactions  are  of  two  kinds, 

completed  and  inieompleted. 

6.  A  completed  transaction  is  one  in  which  the  exchange  of  value  is  made  by 
both  parties  at  the  same  time. 

7.  An  uncompleted  transaction  is  one  in  which  the  transfer  is  made  by  one 
party  but  not  by  the  other,  the  transfer  by  the  second  party  being  made  at  some 
future  time.     Such  a  transfer  is  said  to  be  "on  account." 

8.  An  uncompleted  transaction  is  completed  when  the  transfer  by  the  second 

party  i.:  -^lade  to  the  first,  the  transfer  by  the  first  party  having  been  made  at  some 
previous  time.     Such  a  transfer  is  said  to  be  "on  account." 

9.  During  the  interval  of  time  between  the  transfer  by  the  first  party  and 
th3  transfer  in  payment  by  the  second  party,  which  interval  of  time  is  known  as 
the  "term  of  credit,"  the  second  party  oives  or  is  in  debt  to  the  first  party  and 
the  first  party  trusts  or  gives  credit  to  the  second  party,  therefore, — 


£  BOOKKEEPING   AND   ACCOUNTANCY 

10.  A  debtor  is  one  who  owe^  or  is  in  debt  or  has  been  trusted,  and  the  amount 
he  owes  is  known  as  a  debit  in  the  account  kept  with  him  bj^  the  creditor.  He 
is  the  receiver  of  something  of  value  for  which  he  does  not  at  that  time  give  value. 

11.  A  creditor  is  one  who  isowed  or  has  given  credit  or  trust,  and  the  amount 
that  is  owed  to  him  is  known  as  a  credit  in  the  account  kept  with  him  b}-  the  debtor. 
He  is  the  giver  of  value  for  which  he  does  not  at  that  time  receive  value. 

12.  An  important  distinction.  The  words  "debtor"  and  "creditor"  refer  07ily  to 
persons,  and,  in  the  sense  of  owing  or  being  owed,  debit  and  credit  can  only  be  used 
in  connection  with  personal  accounts.  Debit  and  credit  as  applied  to  all  other  ac- 
counts are  used  only  as  convenient  terms  to  designate  which  side  of  the  account  is 
referred  to,  and  do  not  imply  that  the  things  represented  by  these  accounts  owe  or 
are  owed. 

13.  Things  represented  by  impersonal  accounts,  cannot  owe  or  be  owed, 

although  some  writers  erroneously  personify  them  so  as  to  apply  the  principles  of 
debit  and  credit  relating  to  personal  accounts.  This,  can  never  be  done,  however, 
without  violating  the  simplest  principles  of  logic  and  reason.  Merchandise  could  not 
owe  or  be  owed,  since  it  belongs  to  the  owner  and  is  in  his  possession.  Merchandise 
accounts  show  the  costs  of  purchases  and  the  returns  from  sales.  Likewise  cash  is  in 
the  possession  of  the  owner,  and  cash  account  shows  receipts  on  one  side  and  pay- 
ments on  the  other.  The  various  expense  items  show  what  the  expenses  of  the  busi- 
ness cost,  i.e.,  the  outlays  necessary  to  earn  the  incomes  of  the  business  as  shown 
in  the  various  income  accounts.  The  only  reason  for  using  the  terms  "Dr."  and 
"Cr."  to  designate  the  two  sides  of  impersonal  accounts  is  because  they  are  the 
most  convenient  and  the  briefest  terms  that  can  be  used. 

14.  A  creditor  trusts  or  gives  credit  to  a  debtor  because  of  an  expressed  or  im- 
pUed  pro77iise  or  contract  on  the  part  of  the  debtor  to  pay  the  creditor  at  some  future 
time.  When  expressed,  the  promise  or  contract  maybe  made  orally,  i.e.,  "byword 
of  mouth,"  or  in  writing.  When  in  writing  it  becomes  a  "written  promise  to  pay," 
and  is  usually  in  the  form  of  a  promissory  note  or  of  an  acceptance. 

15.  An  oral  promise  or  contract  to  pay  may  afterwards  be  changed  into  a 
written  promise  or  contract  to  pay,  in  the  form  of  a  promissory  note,  accepted 
draft,  or  other  written  obhgation. 


LEDGER    ACCOUNTS 


ACCOUNTS. 

16.  An  account  is  a  record  of  one  or  more  items  relating  to  the  same  person 
or  thing,  kept  under  an  appropriate  heading  or  title.  It  is  the  custom  to  place 
the  debit  items  on  the  left-hand  side  and  the  credit  items  on  the  right-hand  side  of  the 
accounts  in  the  ledger.  Accounts  show  similar  items  arranged  in  the  most  conveni- 
ent form  for  arithmetical  solution  and  analysis.  They  are  divided  into  several  classes 
depending  upon  their  purpose  and  the  results  they  show.  The  following  is  the 
standard  form  of  a  ledger  account. 

LEDGER  ACCOUNTS.  


Year      Day'           Explanation           Pag^,\  DoUars 

Cenm    Year      Day            Explanation          Page     Dollars      Cenit 

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17.  The  Ledger  is  the  book  of  accounts.  The  debit  and  credit  items  arising 
from  the  various  kinds  of  transactions  are  transferred  from  the  different  books  in 
which  the  transactions  are  classified  and  recorded  to  the  proper  accounts  in  the  led- 
ger. These  books  are  the  cash  book,  sales  book,  purchase  book,  journal,  notes  re- 
ceivable and  notes  payable  books,  and  such  other  books  as  may  be  required,  de- 
pending upon  the  nature  and  extent  of  the  business.  These  are  known  as  hooks  of 
origirial  entry. 


17a.  A  GRAPHIC  ILLUSTRATION  OF  THE  COURSE  OF  TRANSACTIONS,  AND  THE  RE- 
LATIONS OF  BUSINESS  AND  TEACHING  TO  THE  SUBJECTS  OF  BOOKKEEPING  AND 
ACCOUNTING. 


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4  BOOKKEEPING    AND    Af'COUNTANCY 

DEBITING  AND   CREDITING  ACCOUNTS 

18.  To  determine  what  accounts  are  to  be  debited  and  what  accounts  are 
to  be  credited  in  any  transaction  we  apply  the  laws  of  debits  and  credits  which  are 
expressed  in  rides  of^  bookkeeping.  They  are  derived  from  the  customs  and 
practices  of  lousiness  men,  and  conform  with  the  principles  of  accountancy. 

19.  A  law  is  a  statement  of  a  principle.     It  is  a  rule  of  action. 

20.  In  every  transaction  there  are  one  or  more  debit  items  and  one  or  more 
credit  items. 

21.  Debit  and  credit  items  are  of  three  kinds,  (a)  those  relating  to  jjcrsonal 
accounts,  (b)  those  relating  to  accounts  with  cash,  notes,  acceptances,  and  other 
mediums  of  exchange,  and  (c)  those  relating  to  accounts  with  property,  with  uses, 
with  services,  with  allowances,  with  expenses,  and  with  incomes  and  revenues. 

22.  Debit  and  credit  items  relating  to  accounts  with  persons  invariably  show 
that  each  person  debited  is  the  receiver  of  something  of  value  without  at  that  time 
giving  value  in  return,  and  that  each  person  credited  is  the  giver  of  something  of 
value  without  at  that  time  receiving  value  in  return.  C^IO  and  11.)  Such  items 
usually  relate  to  "uncompleted  transactions."    C:?  and  8.) 

22a.     Remember  that  the  "receiver"  is  the  226.     Remember  that    the    "giver"  is    the 

party  who  receives  something  of  value  party  who  gives  something  of  value  to 

from  us  loithoul  at  that  iijne  giving  vol-  us  without  at  that  time  receiving  value  in 

ue  in  return.  return. 

23.  Debit  and  credit  items  relating  to  accounts  with  cash,  notes,  acceptances 
and  other  mediums  of  exchange,  invariably  show  that  each  account  is  debited  for  the 
face  value  of  ichat  is  received  (or  redeemed),  and  that  each  account  is  credited 
for  the  face  value  of  ivhat  is  given  (paid,  issued,  or  Darted  with).  The  principal 
accounts -of  this  kind  are  cash  account,  notes  receivable  account  and  notes  payable 
account. 

24.  Debit  and  credit  items  relating  to  accounts  with  property,  'uses,  services, 
alloivances,  expenses,  incomes,  etc.,  invariably  show  that  each  account  is  debited  for 
the  cost  of  what  is  represented  by  the  account,  and  that  each  account  is  credited 
for  returns  from  what  is  represented  by  the  account.  The  principal  accounts  of 
this  kind  are  those  relating  to  the  purchase  and  sale  of  merchandise,  real  estate  and 
buildings,  stocks  and  bonds,  furniture,  fixtures,  and  other  forms  of  property  and  in- 
vestments of  capital,  and  those  showing  the  expense?  and  incomes  such  as  in- 
terest,' discount,  commission,  merchandise  discounts,  freight  and  express  charges, 
rent,  insurance,  taxes,  wages,  salaries,  and  all  other  accounts  showing  the  sources 
of  the  losses  and  the  gains  of  the  business. 


DETERMINING    DEBITS    AND    CREDITS 
CLASSIFICATION  OF  DEBIT  AND  CREDIT  ITEMS. 


25.  Notice  that  in  debiting  accounts 
as  stated  in  the  preceding  paragra- 
plis,  22,  23  and  24,  in  every  instance 
in  debiting  a  personal  account  the 
receiver  is  debited;  in  debiting  cash, 
notes  receivable  and  notes  payable  ac- 
counts, they  are  debited  for  what  is 
received;  and  in  debiting  all  other  ac- 
counts tiiey  are  debited  for  the  cost  of 
something  of  value  received. 


26.  Notice  that  in  crediting  accounts  as 
stated  in  the  preceding  paragraphs  22, 
23  and  24,  in  every  instance  in 
crediting  a  personal  account  the  giver  is 
credited;  in  crediting  cash,  notes  re- 
ceivable and  notes  payable  accounts, 
they  are  credited  for  wJiat  is  given; 
and  in  crediting  all  other  accounts 
they  are  credited  for  the  returns  from 
something  of  value  given. 


27.  From  the  classification  of  items,  a.s  given  iu  paragraphs  25  and  26, 
the  following  simple  rule  for  debiting  and  crediting  the  proper  accounts  for  all 
items  growing  out  of  the  current  transactions  of  business  is  derived. 


GENERAL  RULE  FOR  DEBITING  AND  CREDITING  ACCOUNTS. 


28.     Debit  tJie  Receiver,  ivhatisreceived,  29.     Credit  the  Giver,  what  is  given,  and 


and  that  which  costs  value. 


that  which  returns  value. 


30,     The  various  applications  of  this  general  rule  to  all  kinds  of  business  trans- 
actions will  be  shown  under  the  different  accounts,  explained  on  tlie  following  pages. 


PERSONAL  ACCOUNTS. 

31.  These  are  accounts  with  individuals,  firms,  and  corporations  (persons), 
which  are  required  in  "uncompleted  transactions, "or  those  transactions  "in  which 
the  transfer  is  made  at  that  iimehy  one  party  but  not  by  the  other."  (^7  and  S) 
Such  transactions  are  said  to  be  "on  account." 


32.  The  object  is  to  ascertain  what  ofJicrs  owe  to  us  on  account  or  7r}uit  we  owe 
to  others  on  account  "during  the  interval  of  time  between  the  transfer  l)y  the  first 
party  and  the  transfer  in  payment  l).y  the  second  party."  (^:9)  During  the  "inter- 
val of  time,"  if  a  personal  account  shows  an  amount  owing  to  us,  it  is  a  resource 
(^461) ;  if  it  shows  an  amount  ouing  to  others,  it  is  a  liahility.  (![462) 


BOOKKEEPING   AND   ACCOUNTANCY 


Rule  for  Debiting  and  Crediting  Personal  Accounts. 

33.     Debit  the  receiver:  credit  the  giver. 
34a    Debit     the    receiver     in    the    proper  346.     Credit  the  giver  in  the  proper  account, 

account. 

35.     The  various  applications  of  the  rule  for  debiting  and  crediting  personal  ac- 
counts are  as  follows: 

{NoI  to  he  memorized.     To  be  used  only  as  called  for.) 


36. 


b. 


d. 


Dehii  persons  in  their  accounts, 
For  the  amount  they  owe  us  at  the  begin- 
ning of  business. 

For  all  goods  or  property  sold  to  them 
on  account. 

For  all  money  paid  or  loaned  to  them 
on  account,  or  paid  by  us  to  others  at 
their  request. 

For  all  goods,  etc.,  we  return  to  them 
for  which  we  have  previously  credited 
them. 

For  all  notes  made  by  us  (notes  pay- 
able) and  given  to  them  on  account. 
For  notes   and   acceptances   of   others 
(notes  receivable)  transferred  by  us  to 
them  on  account. 

For  all  drafts  drawn  by  them  and  accep- 
ted or  paid  by  us  on  account. 
For   our   drafts    or   orders    on    others 
drawn  (or  indorsed)  by  us  in  their  favor 
on  account. 

For  discounts  or  other  allowances  made 
to  us  on  account. 

For  "shortage,"  "damage,"  or  "over- 
charge" claims  they  allow  to  us  on  goods 
for  which  we  have  previously  credited 
them. 

For  freight  or  express  charges  paid  by 
us  when  goods  are  purchased  from  them 
f.  o.  b.  delivery  point,  or  when  goods 
are  sold  to  them  f.  o.  b.  shipping 
point. 

For  the  amount  "thrown  off"  a  debt 
when  they  agree  to  accept  a  part  of 
what  we  owe  them  in  full  satisfaction 
of  the  debt. 


37. 


38 


Observe  that  in  every  instance  the 
party  debited  is  the  receiver  of  some- 
thing of  value  from  us  without  at  that 
time  giving  value  in  return:  hence  the 
rule. 


Credit  persons  in  their  accounts, 
For  the  amount  we  owe  them  at  the 
beginning  of  business. 
For  all  goods  or  property  bought  from 
them  on  account. 

For  all  checks,  money  or  other  cash  re- 
ceived from  them  on  account,  or  paid 
by  them  to  others  at  our  request. 
For  all  goods,  etc.,  they  return  to  us 
for  which  we  have  previously  debited 
them. 

For  all  notes  made  by  them  and  given 
to  us  (notes  receivable)  on  account. 
For  notes  and  acceptances  of  others 
(including  our  own  notes,  etc.,)  trans- 
ferred by  them  to  us  on  account.  f" 
For  drafts  drawn  on  them  by  us  on  ac- 
count. 

For  their  drafts  on  others  drawn  (or 
endorsed)  by  them  in  our  favor  on 
account. 

For  discounts  or  other  allowances  made 
to  them  on  account. 
For  "shortage"  "damage,"  or  "over- 
charge" claims  allowed  to  them  on 
goods  for  which  they  have  previously 
been  debited. 

For  freight  or  express  charges  when 
paid  by  them  on  goods  purchased  from 
them  f.  o.  b.  shipping  point,  or  when 
goods  are  sold  to  them  f.  o.  b.  delivery 
paint. 

For  the  amount  lost  by  us  when  we 
agree  to  accept  a  part  of  what  they  owe 
us  in  full  satisfaction  of  the  debt,  or 
when    the    account    is    uncoUectable. 


39  Observe  that  in  every  instance  the 
party  credited  is  the  giver  of  something  of 
value  to  us  without  at  that  time  receiv- 
ing value  in  return:  hence  the  rule. 


PERSONAL   ACCOUNTS  7 

Note  to  the  teacher  and  student:  The  various  applications  stated  under 
each  account  are  not  to  be  memorized,  but  are  intended  to  assist  the  student  in  apply- 
ing the  rule.  As  they  are  applied  to  transactions,  they  should  be  carefully  studied 
until  their  relation  to  the  rule  is  clearly  understood. 

40.    Transactions  Illustrating  the  Various  Applications  of  the 
Rule  (33)  for  Debiting  and  Crediting  Personal 
Accounts. 

Transactions  with  R.  J.  Maclean  &  Co.,  912  Wabash  Ave.,  Chicago,  111. 

(The  paragraph  numbers  in  brackets  refer  to  the  various  applications  of  the  rule  for  debit- 
ing and  crediting  personal  accounts.) 

Jan.  1.    They  owe  us  on  account,  at  the  beginning  of  business,  $112.50.  (^36a) 

—  Jan.  3.  Sold  them  merchandise  on  account,  $975.  (^366)  — Jan.  5.  Re- 
ceived cash  on  account  $100.  (1I37o)  — Jan.  6.  Bought  merchandise  on  account, 
$318.50.     (37n)     -  -  Jan.  7.    Paid  them  cash  to  apply  on  bill  of  Jan.  6,  $56.50. 

(^36c) Jan.  7.     They  returned  for  credit  goods  ordered  by  mistake  on  Jan. 

3,  amounting  to  $7.75.     (^37p) Jan.  9.     Received  their  note  at  30  days  to 

apply  on  bill  of  Jan.  3,  $125.  (1[37g)  —  Jan.  10.  We  returned  to  them  for 
credit  goods  purchased  Jan.  6,  amounting  to  $12.60.  {^SQd)  —  Jan.  11.  We 
gave  them  our  note  at  60  days,  on  account  of  bill  purchased  Jan.  6,  $50.     (^36e) 

—  Jan.  11.  Received  from  them,  to  apply  on  account,  Jones  &  Co's  note,  which 
they  transferred  to  us  by  endorsement,  for  $37.50.  (1[37r)  —  Jan.  12.  We  have 
drawn  a  draft  at  10-days  sight  on  them  on  account,  in  favor  of  Charles  Adams,  for 
$75.  (^37s)  —  Jan.  13.  Received  from  them,  to  apply  on  account,  their  draft 
at  5  days  sight  on  Alex.  King  &  Co.,  Cleveland,  O.,  drawn  in  our  favor,  for  $91.61. 
(^S7t)  —  Jan.  14.  We  accepted  their  draft  at  10  days'  sight  drawn  on  us,  to  apply 
on  account  of  bill  purchased  Jan.  6,  in  favor  of  Harris  Grocery  Co.,  for  $23.46. 
(^3Qg).  On  the  same  day  we  transferred  to  them,  by  endorsement,  to  apply 
on  account  of  the  same  purchase,  A.  S.  Baird  &  Co.'s  note  in  our  favor  for 
$45.  (^36/)  —  Jan.  16.  They  report  short  weight  in  flour  sold  them  of  Jan.  3, 
am.ounting  to  $4.50,  which  \ve  allow.  (%S7v)  —  Jan.  16.  We  prepaid  freight 
charges  on  goods  sold  to  them  on  Jan.  3,  for  their  account,  $2.20.  (1I36A;)  —  Jan. 
17.  We  allow  them  a  discount  of  1%  on  bill  purchased  Jan.  3,  $9.75.  (^37u)  — 
Jan.  17.  They  allow  us  a  discount  of  2%  on  bill  of  Jan.  6,  $6. 33.  (1[36i)  —  Jan. 
19.  They  have  allowed  us  an  overcharge  claim  which  we  made  on  their  bill  of 
Jan.  6,  for  $2.41.  (^36j)  -  -  Jan.  19.  We  drew  a  draft  at'  5  days'  sight  in  their 
favor,  in  full  for  their  bill  of  Jan.  6,  on  H.  S.  Gray  &  Sons,  for  $120.20.     (^36/i) 

—  Jan.  20.  They  forwarded  us  a  receipted  freight  bill  for  $1.65,  which  was  paid 
by  them  on  goods  shipped  Jan.  3,  which  were  to  be  shipped  f.  o.  b,  delivery 
point.  (^37w;)  —  JaN.  21.  They  have  offered  to  give  us  a  check  of  $110  in  full 
payment  of  the  amount  owed  us  on  account,  Jan.  1,  which  we  have  accepted. 
(^37o).  -  -  The  amount  lost  is  $2.50.  (^37a:)  -  -  Jan.  30.  Received  from  them, 
on  account,  John  G.  Taylor's  acceptance  for  $150  (^37r)  and  their  check  for  $75 
(1f37o). 

What  is  the  balance  of  account  January  31? 


BOOKKEEPING    AND    ACCOUNTANCY 


EXERCISE. 


Prepare  a  ledger  account  for  the  above  transactions  on  ledger  paper,  as 
(//  you  do  not  have  ledger  paper,  rule  the  form  of  a  ledger  page  on  blank 


40u 

follows: 
paper. ^ 

(1)  Read  and  study  each  transaction  carefuU}-. 

(2)  Read  the  special  application,  for  each  transaction,  of  the  rule  for  debiting 
and  crediting  personal  accounts,  indicated  by  the  paragraph  number. 

(3)  Apply  the  rule  (33)  and  make  the  proper  debit  or  credit  entries  in  the 
account,  as  shown  in  the  illustration  (1).    When  completed,  submit  for  approval. 


Illustration  1. 


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9/^  Z^C'a.^^i.A.^  (Z^jL£^  ly 

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V—. — - 

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■- 

7 

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1 

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i^     jro 

// 

"^ 

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f^ 

2.3 

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1 

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f^ 

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V7 

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l> 

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— ^^ 

Z 

v/ 

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L^ 

tfl-fi 

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■   /  zo 

zo 

z/ 

//& 

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y  V  .  « 

7-/ 

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30 

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JO 

/A 

40&.  The  illustration  shows  the  ledger  account  as  it  appears  at  the  end  of 
the  month,  January  31,  with  the  figures  in  the  posting  columns  omitted.  The 
small  figures  showing  the  footings  of  each  column  and  the  balance  of  the  account, 
S299.44,  are  pencil  figures,  written  when  the  account  is  footed,  preparatory  to  tak- 
ing the  trial  balance.  If  it  is  desired  to  close  the  account  for  either  of  the  reasons 
stated  in  ^44,  the  account  would  be  ruled  and  footed,  as  shown  in  illustration  2. 
(1145) 


Illustration  2. 


/^ 

f 

z 

^7\ 

zc 

/    C5- 

^^ 

*f9¥f 

7  zo 

J] 

2./ 

/  /  O 

1                       1     ! 

1  *t  at. 

X  o 

z/ 

Z  so 

■            -  ■  ■ 

n                  ^^ 

4S<? 

1 

1; 

so 

7J\ 

/<7 

i^z.^etyi<^ccyi4^t^^ 

2^i7  V  i^ 

,1       ^y^^i'M 

CLOSING   PERSONAL   ACCOUNTS  9 

40c.  Indicating  canceling  items.  When  payments  are  to  be  applied  to  a  par- 
ticular bill,  the  canceling  items  may  be  indicated  by  letters  used  in  the  order  of 
the  alphabet  as  each  item  is  posted.  (•[46c)  The  same  method  applies  when  the 
balance  of  the  bill  is  to  be  determined  or  paid,  or  when  the  account  is  to  be  analyzed. 
Notice  that  in  the  transactions  for  the  account  of  R.  J.  Maclean  &  Co.  ("1140), 
the  second  transaction  of  January  19  states  that  the  amount  is  "in  full  for  their 
bill  of  Jan.  6;"  consequently,  the  sum  of  the  items  received  to  apply  in  pa^-ment 
of  tnat  bill  should  equal  and  cancel  the  amount  of  the  bill.  The  first  three  of 
the  canceling  items  of  tne  purchase  of  Jan.  6,  on  the  debit  side  of  the  account,  are 
indicated  by  the  letter  "a"  in  the  illustration. 

40d.  Begin  with  the  transaction  of  Jan.  7,  and  place  the  letter  "a"  opposite 
each  item  in  the  account  you  have  just  prepared  on  the  double  line  opposite  the 
amount.  If  the  sum  of  these  items  equals  the  total  amount  of  the  bill,  $316.50, 
place  tne  letter  "a"  opposite  that  amount.  In  like  manner,  indicate  the  items  on 
the  credit  side  of  the  account,  canceUng  the  debit  item  of  Jan.  1,  for  $112.50,  by 
inserting  the  letter  "b"  on  the  double  line  opposite  the  amounts  on  each  side  of 
the  account. 

This  method  of  indicating  canceling  items  illustrates  a  very  common  practice 
in  proving  or  analyzing  accounts.    This  is  a  mixed  account.     (*if51) 

To  Close  Personal  Accounts. 

41.  The  object  is  to  ascertain  the  amount  owed  to  us  by  each  person  or  by  us 
to  each  person  having  an  open  account  on  our  books. 

42.  The  difference  between  the  two  sides  of  a  personal  account  (if  any)  will 
show  the  amount  owed  to  us  or  by  us.  If  the  debit  side  is  the  larger  it  will  show  the 
amount  (balance)  owed  to  us,  which  is  a  resource.  (1f461)  If  the  credit  side  is 
the  larger  it  will  show  the  amount  (balance)  owed  by  us,  which  is  a  liability.  (11462.) 
In  either  case  the  balance  should  appear  as  an  item  in  the  statement  of  resources 
and  liabihties  (^487),  or  in  the  balance  shown  by  the  "accounts  receivable"  or 
"accounts  payable"  accounts  in  that  statement. 

43.  The  difference  shown  by  a  personal  account  is  always  a  balance,  but  if  the 
balance  is  uncoUectable,  then  it  shows  a  loss.  When  a  personal  account  is  consid- 
ered of  doulitful  value,  or  if  any  part  of  it  is  likely  to  be  uncoUectable,  it  may  be 
closed  into  a  "doubtful  accounts"  account  until  sucn  time  as  it  is  found  to  be  posi- 
tively uncoUectable,  when  it  should  be  considered  as  a  loss. 

44.  To  close.  Personal  accounts  should  never  be  closed  unless  they  are  paid 
in  full   and,  consequently,  balance  themselves,   except  in  the   following  cases: 


10 


BOOKKEEPING    AND    ACCOUNTANCY 


(a)  when  an  adjustment  of  the  account  has  been  made  and  the  correct  balance  deter- 
mined, when  it  may  be  ruled  up  and  the  balance  brought  down  to  begin  a  new  ac- 
count, (b)  when  the  space  allotted  is  filled  and  it  is  necessary  to  forward  the  account 
to  another  page,  or  to  a  new  ledger,  when  the  balance  only  should  be  forwarded,  and 
(c)  when  the  party  becomes  insolvent  and  the  account  is  uncollectable,  when  it 
should  be  closed  into  ''bad  debts"  account  or,  if  there  are  few  such  entries,  directly 
into  the  profit  and  loss  account. 

Ruling  Personal  Accounts. 

45.  The  proper  ruling  for  a  personal  account  depends  somewhat  upon  the 
nature  of  the  business  transacted,  and  more  particularly  upon  the  method  followed 
in  the  payment  of  bills.  In  this  respect,  personal  accounts  may  be  divided  into  four 
classes,  (a)  those  accounts  in  which  each  item  or  bill  is  paid  separately,  (6)  those 
accounts  where  several  items  or  bills  are  paid  at  one  time,  (c)  those  accounts  where 
one  item  or  bill  is  paid  in  two  or  more  payments,  and  (d)  those  accounts  where  pay- 
ments are  made  "on  account"'  but  not  in  full  settlement  of  any  particular  item  or 
bill,  which  are  known  as  "running  accounts."  Any  one  or  more  of  these  various 
methods  of  pa^Tnent  may  be  showTi  in  a  single  account,  and  the  account  may  be 
either  an  account  receivable  or  an  account  payable.    (^49  and  1150.) 

46.  The  following  accounts  illustrate  the  various  methods  of  payment  refer- 
red to  and  the  proper  rulings  for  each. 

Illustration  3. 


/J^c^ 


~33^£n^-'.'i^' 


?9zJlr. 

6      TT^L^eC^i-ey 

/Q 

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J.V 

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/Z- 

.          /    jlO       Ug     n 

Z2. 

'     .              i 

f,<i  a.. 

^/ 

US 

L^   t<?  \\ 

30             .                             . 

,       ^/ 

V^ — 

/  C   vjt  !^  ez^. 

7 

/4<jr 

32. 

7<f 

f  ?  ?!    ^7 
f3    3J 

— 

a^. 

^ 

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2^ 

/2    2-/ 

1 

li                1 

i 

46a.  Explanation.  This  account  belongs  to  the  class  described  in  ^4oa  and 
11456.  It  shows  that  the  item  debited  March  6  was  paid  IMarch  16,  that  the  item 
debited  March  12  was  paid  IMarch  23,  and  that  the  item  debited  March  15  was 
paid  IMarch  30.  The  items  of  March  25  and  29  were  paid  April  7  in  one  amount. 
The  red  lines  were  ruled  underneath  the  balancing  items  as  each  credit  entry  was 
made.  The  items  of  April  5  and  24  are  unpaid,  and  their  sum,  shown  in  pencil 
figures,  is  the  balance  of  the  account.    This  is  an  account  receivable.    (1[49) 


RULING  PERSONAL  ACCOUNTS 


n 


Illustration  4 


j:^. 


jZ€i.iJ>^ 


^= 


— MT^'    ^ 

30 


TzYfy 

2.-3  J  i> 


^3\  /g 

S  s-     'or 


466.  Explanation.  The  items  of  August  12,  16  and  25  are  for  purchases  which 
were  paid  in  one  amount  September  5,  at  which  time  the  red  hnes  were  ruled  under 
the  balancing  items.  The  pencil  footing  on  the  credit  side  shows  the  balance  of  the 
account  September  30.  This  is  an  account  payable.  (^50)  It  illustrates  the  class 
of  accounts  described  in  ^456. 


Illustration  5 


J^&^T^'-t.^fl^-er^'ty'^)'^*^^'^^ 


C2^. 

J 

P^zc/^,-^ 

^y 

^7 

30 

„ 

?9z^^ 

/2. 

XL 

" 

Z^ 

„                                 JJ.U  2. 

J7/  •J^rt^^iy/^f- 


2-/  (> 


4^' 


3/ 


^aj\  (2)&^,\/v  J2<z^iAy 


-[^ 


Q- 

y/:7^1[i 

O 

/  6>    v/\    ??2a,' 

o 

/  V/    V/ 

'C- 

3f  ^0' 

/  O  i,    ZO 


,./.; 


cc 


y  0  0 


/so 


/CO 


/^ 


46c.  Explanation  An  examination  of  the  entries  i  n  this  account  in  the  order  of 
their  dates  will  explain  the  rulings  shown.  It  is  an  account  receivable  and  illustrates 
the  practice  of  many  bookkeepers.  It  will  be  noticed  that  when  all  items  balance 
above  a  given  point  they  are  ruled  out,  as  shown  by  those  marked  "a,"  ''6"  and  "c," 
whether  they  are  on  the  same  line  or  not.  The  letters  also  showthe  method  of  indicat- 
ing canceling  items.  The  balance  is  found  by  taking  the  difference  between  the 
two  sides  of  the  accouni,  as  shown  in  the  small  pencil  figures  in  the  left  hand  ex- 
planation column. 


12  bookkeeping  and  accountancy 

Exercises  in  Personal  Accounts. 

47.  Prepare  the  ledger  accounts  for  the  following  examples,  applying  the  rule 
(^33)  to  each  transaction.  If  you  do  not  have  ledger  paper,  rule  the  form  of  a 
ledger  on  blank  paper.  Enter  the  amount  first,  then  the  date.  As  each  entry  is 
made,  insert  the  paragraph  number  and  letter  of  the  particular  application  of  the 
rule  for  debiting  and  crediting  personal  accounts  (^36  and  ^37)  which  applies,  as 
shown  in  brackets  for  the  first  two  items  in  illustration  1.  Rule  out  the  items 
that  balance  on  each  side  of  the  account  as  the  balancing  entries  are  made.  When 
the  examples  are  completed,  present  them  for  approval. 

(1.)    Transactions  with  Robert  G.  Burns. 

April  1.     Sold  him  merchandise  on  account,  $45.     (1I36&)  April  4. 

Sold  him  merchandise  on  account,  $16. April  10.     Received  cash  from  him 

for  bill  sold  April  1,  $45.  {Rule  out  balancing  items  ($45)  on  each  side  of  the  account 
as  shown  in  the  illustration  S.)  —  April  13.  Sold  him  merchandise  on  account, 
$21. April  18.  Sold  him  merchandise  on  account,  $73. April  19.  Re- 
ceived cash  for  bill  sold  April  4,  $16.     {Rule  out  balancing  items.) April  24. 

Sold  him  merchandise  on  account,  $15.     April  25.     Received  cash  from  him 

for  bill  sold  April  18,  $73. April  27.     Received  cash  from  him  for  bill  sold 

April  13,  $21.     {Ride  out  balancing  items.) April  28.    Sold  him  merchandise 

on  account,  $18.  What  is  the  balance  shown  by  the  account?  What  method  of 
paying  bills  is  shown  by  this  account?    (1145a) 

(2.)    Transactions  with  Miller  Brothers. 

May  1.    We  owe  them  on  account,  at  the  beginning  of  business,  $115.25. 

May  3.    Bought  goods  from  them  on  account,  $73.12. May  4.    Paid  them 

cash  in  full  of  account  to  date,  $188.37.     {Rule  out  the  balancing  items  on  the  same 

line.) May  6.     Bought  goods  from  them  on  account,  $87.50. May  8. 

Bought  goods  from  them  on  account,  $17.94. May  9.    Gave  them  our  note 

at  30  days  in  payment  of  bills  of  May  6  and  8,  $105.44.  {Rule  out  balancing  items.) 
-   -  May  12.     Bought    goods  from  them  on  account,  $236.20.     -   -  May  14. 

Bought  goods  on  account,  $36.12. May  15.     Returned  goods  included  in 

bill  purchased  May  12,  $13.75.  -  -  May  16.  Bought  goods  from  them  on  account 
$327.45.     -  -  May  17.     Paid  them  in  full  for  bills  of  May  12  and  14,   $258.57 

{Rule  out  balancing  items.) May  17.    Paid  freight  on  goods  purchased  May 

16,  which  were  to  be  prepaid  to  delivery  point  by  Miller  Brothers,  $4.50.  What  is 
the  balance  shown  by  the  account,  and  who  owes  the  balance,  we  or  Miller  Brothers? 
What  method  of  paying  bills  is  shown  by  this  account?  (^45&)  Does  this  account 
show  a  resource  or  a  liability?  ("[42)  Is  this  an  account  receivable  or  an  account 
payable?    (1150) 

(3.)    Transactions  with  Murphy  &  Morgan. 

June  1.    Sold  them  goods  on  account,  $256.95. June  3.   Received  cash 

^o  apply  on  bill  of  June  1,  $150. June  4.    Received  cash  in  full  for  bill  of  June 

;',  $106.95.    {Rule  out  balancing  items.) June  6.    Sold  them  goods  on  account 

$342.36. June  IC.    They  returned  goods  amounting  to  $7.80. June  11, 

Received  their  note  in  our  favor  at  30  days  in  part  payment  of  bill  of  June  6,  $180. 


EXERCISES   IN    PERSONAL  ACCOUNTS  13 

June  12.  The>  transferred  to  us,  on  account,  a  note  made  by  Marshall  &  Com- 
pany, in  their  favor  for  $100. June  12.    Received  cash  in  full  of  bill  of  June  6, 

$54.56.    {Ride  out  balancing  items.) June  24.    Sold  them  goods  on  account, 

$96.36.     —  June  29.    We  allowed  then  an  overcharge  claim  on  goods  sold  on 

June  24,  $3.60.     -  -  June  30.    Sold  them  merchandise  on  account,  $23.50. 

June  30.  Received  cash  in  full  for  bill  sold  June  24,  $92.70.  (Rule  out  canceling 
items.  It  will  he  necessary  to  rule  on  different  lines.)  (1[46c)  What  is  the  balance 
shown  by  the  account?  What  metnod  in  the  payment  of  bills  is  shown  by  this 
account?     (1[45c)    Is  it  an  account  receivable  or  an  account  payable?     (1[49.) 

(4)  Transactions  with  Williams  &  Reynolds. 

Jan.  1.    At  the  beginning  of  business  they  owe  us  on  account,  $78.50.    We  owe 

them  for  an  unpaid  coal  bill,  $14.50. Jan.  4.    Sold  them  goods  on  account, 

$668.70. Jan.  5.    They  return  us  goods  amounting  to  $10.25. J\n.  8. 

Bought  from  them  on  account  goods  amounting  to  $463.61. Jan.  9.    Received 

Hall  &  Go's  acceptance  in  their  favor,  which  they  have  transferred  to  us  on  account, 

$55.30. Jan.  10.    We  allow  their  claim  of  $1.36  for  an  overcharge  on  goods 

sold  them  Jan.  4. Jan,  10.    Accepted  their  draft  at  10  days'  sight,  on  account 

of  bill  of  Jan.  8,  $165. Jan.  12.    Allowed  them  a  discount  of  1%  on  bill  sold 

them  Jan.  4,  $6.69. Jan.  14.    We  transferred  to  them,  on  account  of  bill  of 

Jan.  8,  F.  C.  Archer's  acceptance  in  our  favor,  $132.50. Jan.  15.     We  made 

draft  on  Miller  Brothers,  in  their  favor,  on  account  of  bill  of  Jan.  8,  for  $100. 

Jan.  15.  They  allowed  us  a  discount  on  bill  purchased  Jan.  8,  $9.37.  —  Jan. 
17.  We  paid  them  balance  due  on  bill  purchased  Jan.  8,  $56.74.  {The  items 
canceling  the  bill  purchased  Jan.  8  may  be  indicated  in  the  account,  as  instructed  in 
*^\Jt.Oc  and  *\Jf.6c.)  —  Jan.  18.  Received  cash  in  payment  of  amount  due  us 
Jan.  1,  $78.50.    {Check  canceling  items  as  instructed  for  the  preceding  transaction.) 

Jan.  19.    Received  their  draft  on  Perkins  Brothers,  in  our  favor,  on  account, 

$350. Jan.  19.     Paid  them  in  settlement  of  coal  bill  owed  to  them  Jan.  1, 

$14.50.     {Check  canceling  items.)     (^40cand46c) Jan.  21.    They  desire  to 

settle  their  account.  What  is  the  balance  shown  by  the  account?  Is  this  an 
account  receivable,  an  account  payable,  or  a  mixed  account?  (1151)  As  it  stands, 
Jan.  21,  to  which  group  does  it  belong? 

(5)  Transactions  with  Rodney,  Gates  &  Go. 

(Note  that  these  are  our  transactions  with  them,  not  theirs  with  us.) 

Sept.     1.    Bought  merchandise  on  account,  $128.15. Sept.  3.    Bought 

merchandise  on  account,  $216.45. Sept.  4.    By  paying  cash,  we  are  entitled 

to  a  discount  of  2%  on  bill  of  Sept.  1,  $2.56.  (1[36i)  We  paid  them  the  balance  in 
cash,  $125.59.    (1[36c)    {Check  canceling  items  as  instructed  in  1[40c  in  this  and  other 

transactions  in  this  account.) Sept.   10.     Bought  merchandise  on  account, 

$33.62.  -  -  Sept.  12.  Bought  merchandise,  $92.18.  -  -  Sept.  14.  Deducted 
2%  discount  on  bill  of  Sept.  12,  $1.84.  Paid  balance  of  the  bill  in  cash,  $90.34. 
{Check  canceling  items.)     —  Sept.  15.    Accepted  draft  at  30  days  in  payment  Df 

bill  of  Sept  10,  for  $33.62. Sept.  17.    We  are  allowed  an  overcharge  claim  on 

bill  of  Sept.  3  for  $4. 16.  We  give  our  note  at  60  days  for  the  balance,  $212.29.  -  - 
Sept.  20.  We  have  paid  a  freight  bill  on  goods  received  Sept.  3,  which  should  have 
been  prepaid  by  Rodney,  Gates  &  Go.,  $9.41.    What  is  the  balance  shown  by  the 


14 


BOOKKEEPING   AND    ACCOUNTANCY 


account?  Is  it  a  resource  or  a  liability?  What  method  was  followed  in  the  payment 
of  bills  in  this  account?  As  it  stands,  is  it  an  account  receivable  or  an  account 
payable?    Ordinarily,  to  which  group  of  accounts  would  it  belong? 

(6)  Transactions  with  Morrell  Mfg.  Co. 

Nov.  1.    Sold    them  a  milling  machine,  on  account,  $340.     -    -   Nov.    20. 

Bought  from  them  1  Acme  forge,  $72.50. Nov.  21,    Paid  them  cash  in  full 

for  the  Acme  forge,  $69.60,  they  allowing  us  a  4%  discount  on  the  bill,  or  $2.90. 

{Check  canceling  items.) Nov.  26.     Received  their  draft  on  King's  Sons, 

drawn  in  their  favor  and  endorsed  by  them  to  us,  in  payment  of  bill  sold  Nov.  1, 

$340. Nov.  29.    Received  cash  from  them  as  a  deposit,  in  part  payment  of 

1  "Hanover "  lathe  No.  3,  not  yet  dehvered  to  them,  $150.  -  -  Nov.  30.  Shipped 
them  1  No.  3  "Hanover"  lathe,  as  per  contract,  $490.  What  is  the  balance  of  the 
account?    To  what  class  of  accounts  does  this  account  belong? 

(7)  Transactions  with  S.  R.  Brown. 

Dec.  10.  Loaned  him  cash,  $75,  which  he  returned  in  payments  as  follovrs: 
Dec.  20,  $10;  Dec.  23,  $20;  Dec.  27,  $30;  Dec.  30,  $10.  Does  the  balance  of  the 
account  show  a  resource  or  a  liability?  How  does  the  account  differ  from  an  ordi- 
nary account  receivable  or  account  payable?    (1[51) 


Grouping  Personal  Accounts. 

48.  For  accounting  purposes,  and  particularly  to  provide  a  convenient  ar- 
rangement of  the  accounts  in  the  ledger,  personal  accounts  are  divided  into  two 
groups  known  as  accounts  receivable  and  accounts  payable. 

49.  Accounts  receivable  are  the  accounts  with  persons  to  whom  we  sell,  and 
usually  show  debit  balances  (if  any)  which  are  resources  or  assets.  The  sum  of 
those  balances  shows  the  amount  owing  from  accounts  receivable,  which  should  be 
included  as  a  resource  item  in  the  statement  ^!  resources  and  habilities.  (Illus- 
tration 93) 

Illustbation  6. 


Notice  that  the  sum  of  these  balances  equals  the  balance  shown  by  the  accounts 
receivable  account.    (1[54) 


PERSONAL  ACCOUNTS 


15 


50.  Accounts  payable  are  the  accounts  with  persons  from  whom  we  buy,  and 
usually  show^  credit  balances  (if  any)  which  are  liabilities.  The  sum  of  these 
balances  shows  the  total  amount  owing  on  accounts  payable,  which  should  be  in- 
cluded as  a  liability  item  in  the  statement  of  resources  and  liabilities.  (Illus- 
tration 93.) 

Illdstration   7. 


■^^^-^.--^^^e^jZez-^-z^t^c-ifz^-i^  3/,  /  (^ 


2^^2=l^i^jAJ'^J.'^-^^^¥-^^ 


-r 


J?^^.^^^?y.'>J^A,  :^  y 


-t^>4-g^>?^--?-Z^i^>-z-g7'^K-^^li-7r- 


r-j-e? 


/■3^  (> 


fj6> 


2Z¥.? 


1^_ 


V-^>^^ 


X2, 


Notice  that  the  sum  of  these  balances  equals  the  balance  shown  by  the  accounts 
payable  account.    (^54.) 

51.  Personal  accounts  showing  transactions  outside  of  those  usually  relating 
to  the  purchase  and  sale  of  goods,  which  cannot  properly  be  classed  with  either  ac- 
counts receivable  or  accounts  payable,  are  not  infrequent.  These  are  sometimes 
called  mixed  accounts,  and  usually  appear  as  separate  items,  or  in  a  separate  group, 
in  the  trial  balance.  They  may  show  either  resources  or  liabilities,  which  in  either 
case  should  be  included  in  the  statement  of  resources  and  habilities.  Again,  goods 
may  be  purchased  from  and  sold  to  the  same  party,  and  the  account  would,  there- 
fore, possess  the  characteristics  of  both  an  account  receivable  and  an  account 
payable.  It  is  not  unusual  for  separate  accounts  to  be  kept  with  the  same  per- 
son, one  for  purchases  and  one  for  sales,  and  in  some  systems  of  bookkeeping  it  is 
necessary. 

52.  When  all  the  accounts  of  a  business  are  kept  in  one  ledger,  it  is  pref- 
erable to  group  the  accounts  receivable  in  one  section  of  the  ledger  and  the 
accounts  payable  in  another  section  of  the  ledger,  reserving  a  third  section  for 
the  general  accounts. 

53.  When  separate  ledgers  are  kept  for  any  one  or  more  of  these  groups,  they 
are  usually  designated  as  the  sales  or  customers  ledger  for  accounts  receivable,  the 
purchase  ledger  for  accounts  payable,  and  the  general  ledger  for  the  general  accounts. 
Where  a  private  ledger  is  kept,  it  should  contain  the  capital  accounts  of  the  owners 
and  any  other  accounts  which  it  is  desired  to  keep  private. 

54.  When  separate  purchase  and  sales  ledgers  are  kept,  it  is  customary  to 
keep  a  controlling  account  for  each  ledger  in  the  general  ledger,  to  which  is  posted 
the  totals  of  special  columns  in  the  various  books  of  original  entry  in  which  are 
entered  the  items  affecting  the  accounts  in  each  ledger.    The  sum  of  the  balances 


16 


BOOKKEEPING    AND    ACCOUNTANCY 


in  either  ledger  must  equal  the  balance  sho-wTi  by  the  controlling  account  in  the 
general  ledger.    (For  fuller  description,  read  1[566) 

54a.  Illustrations  8  and  9  show  the  controUing  accounts  in  the  general 
ledger  footed,  closed,  and  the  balances  brought  down.  These  accounts  are  usually 
closed  at  the  end  of  each  fiscal  period  when  the  books  are  closed.  It  is  from  these 
accounts  that  the  balances  shown  in  the  trial  balance  (11483)  are  taken. 

Illustbation  8 


C^sAc,      /      /^z^siJ-i^i^^ 


/vr  '^'^ 


3  Ci^V  XO 


Ilucstration  9. 


CC'C^£>&ii.<^'Z^<d.yif^i^^L^^i:i^^ 


3/  ,^€ajA.  O 


I        1    w  „/9r 


3  /     /6^*-<>i-ci^^<st^£.<t</ 


.fjsr?  [.^r 


c^A,,     /       /^i<^;t,<«-c<S^ 


-1 — 

S/  s-v  O  3 

^7^x   SS 

^S2-y  2  X 

546.  In  illustrations  8  and  9,  the  letters  "s,"  "j,"  "c,"  etc.,  which  appear 
next  to  the  single  line  to  the  left  of  the  amount  column  on  each  side  of  the  account, 
indicate  the  books  from  which  the  entries  are  posted.  The  letters  represent- 
ing the  principal  books  kept  in  an  ordinary  set  are,  "p"  for  purchase  book,  "s" 
for  sales  book,  "c"  for  cash  book,  "n"  for  note  books,  "j"  for  journal,  etc.  While 
the  student  is  not  required  to  enter  these  letters  in  the  examples  to  be  worked  up 
under  the  various  accounts,  if  they  are  noted  by  him  it  will  assist  him  in  under- 
standing the  books  from  which  the  various  items  are  posted. 


OWNERSHIP  ACCOUNTS. 


55.  The  owner  or  proprietor  of  a  business  may  be  an  individual,  a  firm,  or 
a  corporation.  When  the  o^\Taer  is  an  individual,  his  investment  or  capital  is 
kept  m  an  account  under  his  name,  followed  by  the  word  "Capital,"  as,  "Charles 
Graham,  Capital."     When  two  or  more  persons  unite  in  conducting  a  business, 


OWNERSHIP    ACCOUNTS  17 

each  contributing  a  part  of  the  investment  or  ^capital,  the  union  of  capital  and 
time,  etc.,  is  called  a  firm  or  •partner ship,  and  each  partner's  investment  or  capital 
is  kept  in  an  accoimt  under  his  name  followed  by  the  word  "Partner,"  as,  "O. 
B.  Harvey,  Partner."  When  the  owner  is  a  corporation,  the  investment  or  cap- 
ital account  is  kept  under  a  general  title,  such  as  "Capital  Stock,"  etc.,  which  is 
fully  explained  in  the  chapters  devoted  to  corporations. 

56.  Two  accounts.  Usually  the  proprietor  or  each  partner  snould  have  two 
accounts — a  capital  account  showing  his  interest  in  the  business,  and  a  personal 
account.  In  the  capital  account  only  those  items  affecting  the  permanent  invest- 
ment of  the  o^^^ler  should  be  recorded,  while  the  personal  account  should  contain 
the  items  growing  out  of  his  routine  transactions,  such  as  withdrawals  of  money 
for  salary  or  on  accomit,  or  of  goods  taken  for  private  use,  etc. 


PROPRIETOR'S  AND  PARTNER'S  CAPITAL  ACCOUNTS. 

57.  These  accounts,  while  widely  different  in  their  purpose,  are  kept  much 
like  ordinary  personal  accounts.  They,  however,  are  affected  by  the  gains  and  losses 
resulting  from  and  incidental  to  the  business  conducted,  and,  therefore,  are  not 
closed  U7itil  after  the  gains  and  hsses  have  been  ascertained.  They  should  be  kept  in 
the  general  ledger  or  in  a  private  ledger 

58.  The  object  is  to  show  the  interest,  equity,  or  ownership  of  the  proprietor 
or  partner  in  the  business. 

58a.  There  should  be  a  distinction  made  between  the  owner's  or  proprietor' s 
capital  and  the  business  capital  of  a  concern.  The  former  represents  the  interest 
or  equity  of  the  owner  or  proprietor  after  all  the  debts  of  the  concern  have  been  paid, 
which  is  shown  by  the  difference  between  the  total  resources  and  the  total  liabili- 
ties, while  the  latter  is  represented  by  the  total  resources  or  possessions  of  the  con- 
cern including  what  is  owing  to  the  creditors. 

586.  The  business  capital  of  a  concern  is,  therefore,  made  up  of  the  owners' 
capital,  and  the  creditors'  capital,  whose  interest  or  equity  is  shown  by  the  lia- 
bilities. If  there  are  no  creditors,  there  is  no  division  of  interest  in  the  ownership. 
Creditors  have  the  first  claim  against  resources,  and  are  given  precedence  over  the 
claims  of  owners.  For  this  reason,  when  the  owner  is  a  corporation  it  Ms  not 
unusual  to  designate  its  obligations  to  its  stockholders  as  secondary  liabilities. 
Owners'  claims,  whether  the  ownership  is  vested  in  an  individual,  a  firm,  or  a  cor- 
poration, must  be  met  from  what  remains  of  the  resources  after  all  other  creditors 
have  been  satisfied.  If  the  remaining  resources  are  not  sufficient  to  meet  the 
owners'  claims,  the  shortage  is  the  owners'  loss.  Where  the  ownership  is  represented 
by  partners  or  stockholders,  the  resources  remaining  after  all  other  creditors  are 
satisfied  are  distributed  pro  rata  among  them. 


18 


BOOKKEEPING   AND   ACCOUNTANCY 


Rule  for  Debiting  and  Crediting   Proprietor's   and   Partner's   Capital 

Accounts. 


59.  Debit  the  receiver:  credit  the  giver. 

59a.  Debit  the  proprietor  or  partner  in  his 
capital  account  for  withdrawals  from 
his  capital  investment. 


596.     Credit  the  proprietor  or  partner  in  his 

capital  account  for  his  capital  invest- 
ment, or  when  he  increases  his  capital 
investment. 


60.     The  various  applications  of  the  rule  for  debiting  and  crediting  capital 
accounts  are  as  follows: 


61.  Debit  the  proprietor  or  partner  in 
his  capital  account. 

a.  For  what  he  owes  to  others  at  the  begin- 
ning of  business  to  be  paid  from  the 
funds  of  the  business. 

b.  For  all  withdrawals  of  money  or  prop- 
erty from  the  capital  of  the  business. 

c.  For  all  his  personal  debts  paid  from  his 
capital. 

d.  For  the  debit  balance  shown  by  his 
personal  account,  if  it  is  to  be  deducted 
from  his  capital  investment. 

e.  For  his  net  loss,  or  that  part  of  it  which 
is  to  be  deducted  from  his  capital  as 
shown  by  the  profit  and  loss  statement, 
or  by  the  profit  and  loss  account,  when 
that  account  is  closed. 


62.  Credit  the  proprietor  or  partner  in 
his  capital  account. 

/.  For  what  he  invests  at  the  beginning  of 
business  as  capital. 

g.  For  his  subsequent  investments  of 
capital. 

h.  For  any  debts  of  the  busines  paid  by 
him  from  his  private  funds,  as  an  addi- 
tional investment  of  capital. 

i.  For  the  credit  balance  shown  by  his  per- 
sonal account,  if  it  is  to  be  added  to 
his  capital  investment. 

j.  For  his  net  profit,  or  that  part  of  it 
which  is  to  be  added  to  his  capital  as 
shown  by  the  profit  and  loss  statement, 
or  by  the  profit  and  loss  account,  when 
that  account  is  closed. 


63.     Transactions  Illustrating  the  Various  Applications  of  the  Rule  for 
Debiting  and  Crediting  Proprietor's  and  Partner's  Capital  Accounts. 


Capital  account  of  F.  A.  Raymond. 


March  1.  He  invests  $8000.  (11 62/)  He  owes  on  a  personal  account  to  be 
paid  from  the  funds  of  the  business,  $140.  (IfGla)  -  -  May  1.  He  adds  to 
his  capital  investment,  $5000.  W2g)  --Sept.  1.  He  withdraws  from  his 
capital,  $1500.  (11616)  -  -  Nov.  1.  He  pays  a  note,  on  which  he  had  borrowed 
money  that  was  used  in  the  business,  from  his  private  funds,  as  an  additional  invest- 
ment of  capital,  $6000.  {%2h)  -  -  Dec.  1.  His  personal  note  for  $100  is  paid, 
which  is  to  be  deducted  from  his  capital.     (1161c)     -  -  Dec.  31.     He  is  debited 


CAPITAL   ACCOUNTS 


19 


for  his  net  loss,  as  shown  by  the  profit,  and  loss  statement,  $453,  at  which 
time  his  account  is  closed,  footed,  and  the  balance  brought  down,  showing  a 
net  capital  of  S16,807.  (^61e,  66)  --Jan.  12.  He  withdraws  cash  from  his 
capital,  $1000.  —  Jan.  31.  His  personal  account  shows  a  debit  balance  of 
$200,  which  he  wishes  to  be  deducted  from  his  capital  account.  (1I61d,  71a) 
—  Jan.  31.  He  is  credited  for  his  net  profit,  as  shown  by  the  profit  and  loss 
statement,  $1202.46.     {%2j,  66)     What  is  his  net  capital,  January  31? 


EXERCISE. 

63a.     Prepare  a  ledger  account  for  the  above  transactions  on  ledger  paper,  as 
follows : 

(1)  Read  and  study  each  transaction  carefully. 

(2)  Read  the  special  application  for  each  transaction  of  the  rule  for  debiting 
and  crediting  capital  accounts,  indicated  by  paragraph  numbers. 

(3)  Apply  the  rule  (59)  and  make  the  proper  debit  and  credit  entries  in  the 
account  as  shown  in  illustration  10.     When  completed,  submit  for  approval. 

Illustration  10. 


.^rM. 


jyz^ 


3/ 


M!J&Sfe«il<z-«>»'t^ 


^^g^t^<»>t.<g^;:»^.g>^X^     (j^ 


PUJ^Jir^^  . 


Jj_?U^j2,Z.^2-iZkZ^ 


/l^-^'T 


/■5-ao 


/oo 


4tX^ 


C  ooo 


I 

a. 


U^COfJ 


3/  \^yt,<t<^>t^aZy'Ya^ 


/"g^^^^l 


Tz^J-j&z^luZiid. 


<2-  /  oa  a 


^^J. 


?i^'/32U^i:cta^ 


/g'CO  f  ^fo 


/i>fof  ^6, 


636.  The  illustration  shows  the  account  as  it  appears  at  the  end  of  the  month. 
The  figures  are  omitted  from  the  posting  columns.  The  small  pencil  figures  show- 
ing the  footings  of  each  column  and  the  balance  of  the  account  are  written  when 
the  account  is  footed  preparatory  to  taking  the  trial  balance.  The  account  is 
balanced,  ruled,  and  the  balance  brought  down  after  the  net  profit  for  the  year  and 
the  balance  shown  by  the  proprietor's  personal  account  are  posted  from  the  clos- 
ing entries  in  the  journal. 


20  BOOKKEEPING   AND   ACCOUNTANCY 

To  Close  Proprietor's  or  Partner's  Capital  Account. 

G4.  The  object  is  to  ascertain  the  amount  of  his  net  capital  or  net  insolvency 
at  a  certain  date. 

65.  The  difference  between  the  two  sides  of  a  capital  account,  after  the  net 
profit  or  the  net  loss  of  the  proprietor  or  partner  and  any  other  accounts  affecting 
it  have  been  closed  into  it,  shows  the  proprietor's  or  partner's  net  capital  or 
net  insolvency,  (a)  net  capital  when  the  credit  side  is  the  larger,  (b)  net  insolvency 
when  the  debit  Oide  is  the  larger.  In  either  case  they  should  be  shown  in  a  sep- 
arate section  of  the  statement  of  resources  and  liabilities,  which  is  the  last  section 
of  that  statement. 

66.  To  close. — After  the  net  profit  or  the  net  loss  is  posted  from  the  closing 
entry  in  the  journal,  if  the  credit  side  is  the  larger,  enter  on  the  debit  side 
in  red  ink,  (1)  the  amount  of  the  difference,  (2)  the  date  of  closing,  and  (3)  the  words 
"Net  Capital"  or  "Balance."  Then  rule  the  account  as  shown  in  illustration  10, 
and  bring  down  the  balance  (in  black  ink)  on  the  opposite  side,  entering  the  date 
of  the  next  business  day.     (See  second  closing.) 

67.  //  the  debit  side  is  the  larger,  enter  the  difference  on  the  credit  side  using 
the  words  "Net  Insolvency"  or  "Balance."  After  the  account  is  ruled  and  footed 
the  amount  is  brought  down  on  the  debit  side  of  the  account. 

Exercises  in  Proprietor's  and  Partner's  Capital  Accounts. 

68.  Prepare  ledger  accounts  for  the  following  examples.  As  each  entry  is 
made,  insert  the  paragraph  number  and  letter  of  the  particular  application  of  the 
rule  for  debiting  and  crediting  capital  accounts  which  applies.  Foot,  balance  and  rule 
up  the  accounts  and  bring  down  the  balance  when  so  instructed. 

(1)  Capital  account  of  Henry  B.  Walters. 

Jan.  1.  He  invested  $5,000.  (^62/)  -  -  July  1.  He  invested  $2,000.  -- 
Oct.  1.  He  drew  out  $800.  (1f61fe).  What  was  the  balance  shown  by  his  account  at 
the  close  of  the  year,  Dec.  31,  at  the  time  of  taking  the  trial  balance? 

Dec.  31.  When  the  profit  and  loss  statement  was  made  out  for  the  year's 
business,  it  was  found  that  his  net  gain  was  $1,275.  (1f62j)  What  was  his  net 
capital?    Show  the  account  ruled  and  closed,  as  illustrated  in  example. 

(2)  Capital  account  of  George  Henderson. 

Jan.  1.    He  invested  $10,000. Jan.  1.    He  owed  to  others  to  be  paid  from 

the  funds  of  the  business,  $1,150. Feb.  1.    He  invested  an  additional  $3,000. 

April  1.    He  withdrew  from  his  investment,  $1,000. July  1.    He  pur- 


THB   OWNER   AND   THE    BUSINESS  21 

chased  a  warehouse  and  lot  for  his  business,  for  which  he  paid  from  his  private 

funds  as  an  additional  investment  of  capital,  $4,000.     (1I62A) Dec.  31.    At 

the  close  of  the  year's  business  his  profit  and  loss  statement  showed  a  net  profit 
lor  the  year  of  $4,250.  (1[62j)  What  was  his  net  capital  at  the  beginning  of  the 
aecond  year's  business? 

(3)     Capital  account  of  Charles  E.  Ford,  Partner 

Jan.  1.    He  invested  $26,700.    He  owed  on  notes,  which  were  assumed  by  the 

firm,  $1,700. June  10.     He  purchased  an  automobile,  for  which  the  firm's 

check  was  giyen,  to  be  deducted  from  his  capital,  $1,600. June  30.    His  net 

loss  for  the  half  year,  as  shown  by  the  profit  and  loss  statement,  was  $790.  Prepare 
the  account  showing  his  net  capital  June  30,  with  the  account  properly  ruled  and 

footed. July  15.    He  paid  from  his  private  funds  the  firm's  note  for  $3,000 

as  an  additional  investment. Sept.  1.  He  Mathdrew  from  his  capital  invest- 
ed, $1,000. Dec.  31.    His  net  gain  was  shown  to  be  $7,450.    Show  his  net 

capital  Jan.  1,  with  the  account  properly  footed  and  ruled. 

THE  RELATIONSHIP  BETWEEN  THE  OWNER  AND  THE  BUSINESS. 

69.  Many  authors  have  adopted  the  plan  of  personifying  the  business,  whether 
it  be  the  business  of  an  individual,  a  firm,  or  a  corporation,  not  only  in  formulating 
rules  for  capital  accounts,  such  as  "  Credit  the  proprietor  for  what  tJie  business 
receives,"  but  for  the  general  accounts  as  well;  hence  we  see  such  rules  as  "Debit 
what  the  business  receives,"  "Credit  what  the  business  disposes  of,"  "Debit  cash 
for  all  cash  the  business  receives, "  "Debit  expense  for  all  expenses  of  the  business, " 
etc.  These  and  many  similar  statements  set  up  the  theory  that  a  business  is  an 
active  personality  with  power  to  receive  and  dispose  of — to  do  or  not  to  do;  but 
this  theory  is  illogical  and  untenable,  because  a  business  is  merely  the  creation  of 
the  parties  who  own,  control,  manage,  and  conduct  it,  whether  they  are  real  or 
fictitious  (corporate)  persons.  It  has  power  of  itself  to  do  nothing.  It  could  not 
exist  without  an  owner.  Only  the  owner  can  sue  or  be  sued.  Therefore,  this  theory 
is  not  recognized  in  this  work. 

69a.  The  only  purely  personal  relation  established  in  connection  with  any 
business  is  between  the  owner  (represented  in  the  real  or  fictitious  persons  conduct- 
ing it)  and  the  persons  who  deal  with  the  owner,  which  is  the  usual  relation  of 
debtor  and  creditor.       (^11  and  ^12.) 

696.  There  is,  however,  a  semi-personal  relation  established  between  the 
owner  and  the  business  itself,  but  it  is  a  relation  between  the  owner  and  something 
which  is  not  or  could  not  be  a  debtor  or  a  creditor.  While  the  owner  is  credited  in  his 
capital  account  for  what  he  puts  into  the  business,  the  business  does  not  become  in- 
debted  to  him  in  any  way,  nor  is  his  investment  considered  as  a  liability  of  the  business, 
because  he  owns  the  business  and  its  success  or  failure  rests  with  him.  If  he  with- 
draws from  the  capital,  he  is  debited  in  his  capital  account,  not  that  he  owes 
anything,  but  because  he,  as  the  owner,  is  charged  back  with  something  that  he  form- 
erly put  into  the  business  or  that  he  has  earned  in  conducting  the  business.  The 
same  is  true  of  the  owner  in  a  corporation,  although  the  earnings  pass  to  the  stock- 
holders through  a  dividend  instead  of  through  the  capital  account. 


22  BOOKKEEPING    AND    ACCOUNTANCY 

PROPRIETOR'S  AND  PARTNER'S  PERSONAL  ACCOUNTS 

70.  The  personal  account  of  a  proprietor  or  partner  is  treated  like  any  other 
persona]  account.  It  is  indicated  by  adding  the  word  "Personal"  in  the  heading. 
It  is  opened  for  the  purpose  of  keeping  incidental  items,  such  as  withdrawals  on 
account  of  salary,  etc.,  separate  from  the  items  entered  in  the  more  permanent 
capital  account. 

71.  The  personal  account  of  a  proprietor  or  partner  is  debited  (a)  for  all 
sums  withdrawn  for  private  use  which  are  not  to  be  deducted  from  the  capital 
investment,  (6)  for  any  personal  debts  paid  or  to  be  paid  from  the  funds  of  the 
business,  (c)  for  all  sums  collected  from  customers  and  retained  by  the  proprietor 
or  partner.  It  is  credited  (d)  for  any  sums  paid  in  subject  to  immediate  withdrawal, 
(e)  for  any  debts  of  the  business  paid  from  private  funds  which  are  not  to  apply  on 
the  capital  investment  and  (/)  for  such  part  of  the  net  gain  as  is  to  be  withdrawn 
as  salary  or  otherwise. 

71g.  The  balances  shown  by  the  proprietor's  or  partner's  personal  or  capital 
accounts  are  not  to  be  included  with  accounts  receivable  or  accounts  payable, 
which  include  only  those  with  outside  parties.     (1[49  and  1f50) 

72.  The  difference  shows  the  balance  owed  to  or  by  the  proprietor  or  partner, 
the  same  as  any  other  personal  account,  and  the  account  is  closed  in  the  same  man- 
ner. When  the  account  is  to  be  closed  into  the  proprietor's  or  partner's  capital 
account,  it  must  be  done  by  a  separate  journal  entry.     (1[72a) 

72a.  The  final  disposition  of  a  balance  shown  by  a  proprietor's  personal  ac- 
count is  determined  entirely  by  the  wishes  of  the  individual  or  by  agreement  between 
partners.  When  such  an  account  is  not  credited  with  any  stated  salary  and 
is  charged  with  sums  withdrawn  from  time  to  time,  it  is  not  unusual  for  the 
account  to  be  closed  by  debiting  the  capital  account  and  crediting  the  personal 
account  for  the  amount  necessary  to  balance  the  personal  account,  which  must 
be  done  by  separate  journal  entry;  or  should  the  personal  account  show  a  credit 
balance  which  it  is  desired  to  add  to  the  capital  investment,  the  personal  account 
may  be  debited  and  the  capital  account  credited  for  the  amount  to  close, 

726.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 

FOR  Debiting  and  Crediting  the  Proprietor's  and  Partner's 

Personal  Accounts. 

Personal  account  of  L.  A.  Raymond. 

The  following  sums  were  paid  by  Mr.  Raymond  for  his  personal  account: 
--Jan.  5.  He  paid  his  gas  bill,  $7.50.  (!I716)  -  -  Jan.  10.  He  paid  his  life 
insurance  premium,  $47.52.  — Jan.  16.  He  paid  his  grocery  bill,  $31.40.  — 
Jan.  21.  He  withdrew  cash,  $75.  (1I71o)  --Jan.  25.  He  paid  his  house  rent, 
$35.     -  -  Jan.  31.     He  paid  his  electric  light  bill,  $3.58. 


EXERCISES    IN   OWNERS'    PERSONAL   ACCOUNTS 


23 


72c.     Prepare  a  ledger  account  for  the  above  transactions,  as  instructed  in 
1[63a. 


Illustration  11. 


C:^(^2^^^;j^7^^:Z:^7:Z::^:^_-^S^^^c^^>2^^^1. 


_Oayny.\ 


T 


3  /  ,  £^L^.£^.S-^££-        o 


jWo    Jkx^,3/\jQx^UZit^y'<ii-^      il      2.00\ 


200 


ZOO 


lid.  The  ilhistration  (11)  shows  the  account  as  it  appears  closed  at  the  end  of 
the  month,  after  the  journal  entry  transferring  the  total  amount,  $200,  to  his  capital 
account,  had  been  made  and  posted  as  per  his  instructions.  (If 72a)  The  proper 
journal  entry  for  making  the  transfer  is  shown  in  illustration  12. 


Illtjstratiox  12. 


.^Z- 


i.OO 


xaa 


Exercises  in  Proprietor's  and  Partner's  Personal  Accounts. 
72e,     Prepare  ledger  accounts  for  the  following  examples : 

(1)  F.  A.  Raymond's  personal  account  was  debited  and  credited  for  the  fol- 
lowing items  during  the  month  of  February: 

Feb.  3.  He  collected  a  bill  from  a  customer  and  retained  it  for  his  private  use, 
S15.  (^71c)  —  Feb.  7.  A  bill  for  coal  used  in  his  residence  was  paid  in  cash, 
$10.50.  (^716)  -  -  Feb.  15.  He  withdrew  cash  for  his  personal  use,  $100.  -  - 
Feb.  18.  He  paid  bill  of  his  family  physician,  by  check,  $24.  -  -  Feb.  28.  He 
instructed  that  his  account  be  credited 'with  his  monthly  salary  of  $200.  (1[71/) 
What  was  the  balance  shown  by  his  account? 

(2)  The  personal  account  of  B.  M.  Beck,  partner  in  the  firm  of  Beck  &  Bald- 
win, was  debited  and  credited  for  the  following  transactions : 

April  10.  He  withdrew  cash,  on  account  of  salary,  $25.  -  -  April  18.  He 
deposited  cash  in  the  firm's  bank  account,  $100.  (1[71c?)  -- April  24.  He  col- 
lected from  a  customer  and  kept  for  his  personal  use,  $16.  —  April  25.  He  with- 
drew, by  check,  the  cash  deposited  in  the  firm's  account  April  18,  $100.     -  -  April 


24 


BOOKKEEPING   AND    ACCOUNTANCY 


30.     His  account  was  credited  for  one  month's  salary,  $150.    What  was  the  balance 

shown  by  his  account? 


NOTES  RECEIVABLE  AND  NOTES  PAYABLE 

73.  Notes  receivable  arc  the  notes  or  acceptances  of  others  made,  drawn,  or 
endorsed  in  our  favor,  i.e.,  those  on  which  we  will  receive  payment  when  they  are 
due. 

74.  Notes  payable  arc  our  own  notes  or  acceptances  made,  drawn,  or  endorsed 
in  favor  of  others,  i.e.,  those  which  we  are  to  pay  when  they  are  due. 

75.  Written  promises  to  pay  are  usually  in  the  form  of  promissory  notes  or 
accepted  drafts.     (1[15) 


Illustration  13. 


A  Promissory  Note 


fr/fC^ 


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rt?^^  iPC-Cf^^- 


■f^^y^.^-^.^y      //ir-7!- 


Mo>Zui> 


Illustration   14. 


An  Accepted  Draft — Acceptance 


\Cm7ie 


W6-l/ie^,    ^4-7/^ 


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^c^.r'1-^.,-^r^^.--r^r^^'^.^e^r'^l'-^^. 


>^-/y 


S^i% 


JL^-<:22=3-iA 


-^ 


MEDIUMS   OF   EXCHANGE — NOTES   AND   DRAFTS  25 

76.  They  both  show  a  condition  of  indebtedness,  notes  receivable  correspond- 
ing with  accounts  receivable  (1149)  and  notes  payable  corresponding  with  accounts 
payable  (1[50).  The  principal  difference  between  a  note  receivable  or  a  note  payable 
and  a  personal  account  is  that  the  one  is  a  written  promise  to  pay,  and  the  other  is 
an  oral  or  implied  promise  to  pay.     (1[14) 

77.  Notes  and  acceptances  are  generally  received  and  issued  in  settlement  of 
personal  accounts,  thus  changing  an  oral  promise  to  a  written  promise,  which  is 
in  fact  a  written  contract. 

77a.  If  A  owes  B  on  account  and  afterwards  A  gives  B  his  note  or  acceptance 
in  settlement,  while  the  record  of  A's  indebtedness  in  B's  books  is  transferred  from  A's 
personal  account  to  the  notes  receivable  account,  A's  indebtedness  to  B  remains 
just  the  same,  except  that  in  some  states  and  under  some  circumstances  the  written 
promise  (note  or  acceptance)  may  be  more  binding  upon  A. 

78.  The  principal  advantage  of  notes  and  acceptances  is  that  they  are 
negotiable,  that  is,  they  are  transferable  from  one  person  to  another,  which  lends  to 
them  the  characteristics  of  mediums  of  exchange,  and  greatly  increases  their  useful- 
ness in  the  transaction  of  business. 

79.  Because  of  their  negotiability,  notes  and  acceptances  are  frequently 
bought  and  sold,  are  discounted  at  bank  to  raise  funds,  are  transferred  "on  account, " 
and  are  sometimes  given  as  security  for  loans  or  for  debts. 

NOTES  RECEIVABLE  ACCOUNT. 

80.  Notes  receivable  account  is  one  of  the  class  in  which  items  relating  to 

mediums  of  exchange  are  recorded.     (^21,  ^23,  ^78) 

81.  Notes  receivable  consist  of  notes  and  accepted  drafts  (acceptances)  the 
value  of  which  we  are  to  receive  when  due. 

82.  The  object  of  the  account  is  to  show  (a)  the  amount  of  notes  and  accept- 
ances received  from  others,  (6)  the  amount  of  these  notes  and  acceptances  which 
have  been  redeemed  and  returned  (given  back)  to  those  who  issued  them,  or  which 
have  been  disposed  of  to  others,  and  (c)  the  amount  of  notes  and  acceptances  on  hand, 
at  any  date,  which  is  a  resource. 

_82a.  "On  hand"  includes  all  notes  and  acceptances  sent  to  banks  for  col- 
lection, or  in  attorney's  hands  for  collection.  All  notes  receivable  are  considered 
"on  hand"  until  actual  payment  has  been  received.  Any  note  receivable  that 
cannot  be  collected  is  a  loss. 

83.  All  items  must  first  appear  on  the  debit  side  of  this  account  before  they 
can  appear  on  the  credit  side,  because  others'  obhgations  to  pay  must  be  received 
before  they  can  be  given  back  to  those  who  issued  them. 


26 


BOOKKEEPING    AND    ACCOUNTANCY 


Rule  for  Debiting  and  Crediting  Notes  Receivable  Account. 


84.     Debit  what  is  received:  credit  what  is  given. 


84a.  Debit  notes  receivable  (at  face 
value)  for  notes  and  acceptances  of  others 
received. 


846.  Credit  notes  receivable  (at  face 
value)  for  notes  and  acceptances  of  others 
given. 


85.     The   various  applications  of  the  rule  for  debiting  and  crediting  notes 
receivable  are  as  follows: 


86.     Debit  notes  receivable  account  (a< /ace 
value), — 

a.  For  all  notes  and  acceptances  of  others 
invested  in  the  business. 

b.  For  all  notes  and  acceptances  received 
which  are  made  or  drawn  in  our  favor. 

c.  For  all  notes  and  acceptances  made  pay- 
able to  others  and  transferred  to  us  by- 
endorsement  or  otherwise. 

d.  For  all  time  drafts  drawn  by  ourselves 
in  our  own  favor,  when  received  after 
acceptance. 


88.  Observe  that  in  every  instance  notes 
receivable  account  is  debited  for  the 
amount  of  notes  and  acceptances  of 
others  received;  hence  the  rule. 


87.  Credit  notes  receivable  account  {at 
face  value), — 

e.  For  all  notes  and  acceptances  we  hold 
against  others  when  paid  and  returned 
(given  back)  to  them. 

/.  For  all  notes  and  acceptances  of  others 
which  we  sell  or  have  discounted. 

g.  For  all  notes  and  acceptances  which  we 
transfer  to  others  "on  account"  or  for 
any  purpose,  by  endorsement  or  other- 
wise. 

h.  Foi  all  part  payments  received  on  others' 
notes  and  acceptances. 

89.  Observe  that  in  every  instance  notes 
receivable  account  is  credited  for  the 
amount  of  notes  and  acceptances  of 
others  given  (paid,  redeemed,  or  dis- 
posed of);  hence  the  rule. 


90.     Transactions  Illustrating  the   Various    Applications  of  the  Rule 
(T[84)  FOR  Debiting  and  Crediting  Notes  Receivable  Account. 

Jan.  1.    Arthur  Gordon's  note,  due  on  Jan.  15,  was  invested  in  the  business, 

$500.    (1[86a)  • Jan.  4.    Received  Richardson  &  Co's  note,  at  20  days,  for  $450 

(^866.) Jan.  6.      Received  Moore  &  Nevin's  acceptance  in  our  favor,  at  15 

days,  on  account,  $375.    (^866.) Jan.  15.    R.  S.  Wiley  has  transferred  to  us 

by  endorsement,  to  apply  on  account,  Dane  &  Ritchie's  note,  due  Feb.  15,  for  $220.10 

(•[[SGc) Jan.  15.    Received  cash  in  payment  of  Arthur  Gordon's  note  invested 

Jan.  1,  $500.     (l[87e.) Jan.  17.    Received  our  draft  on  F.  B.  Moore,  drawn 

in  our  own  favor  at  30  days'  sight,  for  $360.75,  which  he  has  returned  to  us  after 
acceptance  (^86(7.)  -  -  Jan.  19.  Received  R.  N.  Willis'  note  at  60  days  on 
account,  $900. Jan.  21.  Received  cash  payment  of  Moore  &  Nevin's  accep- 
tance of  Jan.  6,  due  today,  $375.         (1[87e) Jan.  23.     Received  King  Mfg. 

Co's  acceptance  at  60  days,  on  account,  $302.14. Jan.  24.     Received  cash 

in  payment  of  Richardson  &  Co.'s  note  received  Jan.  4,  due  today,  $450. 

Jan.  25.  Transferred  to  M.  F.  Marshall,  F.  B.  Moore's  acceptance  in  our  favor, 
received  Jan.  17,  ou  account,  $360.75.     {'^S7g)  -  -  Jan.  26.     We  had  R.  N.  Willis' 


MEDIUMS    OF   EXCHANGE — NOTES   RECEIVABLE   ACCOUNT 


27 


note  for  $900,  received  Jan.  19,  discounted  at  bank,  receiving  credit  for  the  proceeds. 

(!i87/) Jan.  30.     Received  Arthur  Gordon's  note  at  GO  days,  on  account, 

$377.76. Jan.  31.     Received  Moore  &  Nevin's  acceptance  at  30  daj^s,  on 

account,  $200. Jan.  31.     Received  from  King  Mfg.  Company,  in  part  pay- 
ment of  their  acceptance  received  Jan.  23,  $200.     (^87/i) 

What  is  the  balance  shown  by  the  account  January  31? 


EXERCISES. 

90a.     Prepare  a  ledger  account  for  the  above  transactions  on  ledger  paper,  as 
follows : 

(1)  Read  and  study  each  transaction  carefully. 

(2)  Read  the  special  application,  for  each  transaction,  of  the  rule  for  debiting 
and  crediting  notes  receivable  account  indicated  by  the  paragraph  number. 

(3)  Apply  the  rule  (^84)  and  make  the  proper  debit  and  credit  entries  in  the 
account,  as  shown  in  illustration  15  and  submit  for  approval. 


Illustration   15. 


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90&.  The  illustration  shows  the  account  as  it  appears  on  Jan.  3 1 ,  with  the  figures 
in  the  posting  columns  omitted.  The  sma  I  pencil  figures  show  the  footings  of  each 
column  and  the  balance  of  the  account.  (^406)  The  letters  "aa, "  "bb, "  show 
canceling  items.     (^40c   ^97) 

To  Close  Notes  Receivable  Account. 

91.  The  difference  between  the  two  sides  of  the  notes  receivable  account 
(if  any)  will  show  the  amount  (balance)  of  others'  paper  on  hand,  which  is  a  resource 
that  should  be  included  as  an  item  in  the  statement  of  resources  and  liabilities. 
The  sum  of  the  notes  and  acceptances  on  hand  must  agree  with  the  balance  shown 
by  account.     (^82c) 

92.  To  close.  Notes  receivable  account  should  never  be  closed  unless  the 
account  balances,  except  when  it  is  necessary  to  forward  the  accoimt  to  another 


28  BOOKKEEPING   AND   ACCOUNTANCY 

page  when  the  balance  should  be  entered  on  the  credit  side  in  red  ink  and  forwarded 
to  another  page  in  black  ink  on  the  opposite  side  of  the  page.     (^98) 


93.  When  all  items  balance  above  a  given  point  they  may  be  "ruled  out," 
as  shown  in  illustration  15.  It  is  generally  the  practice  to  rule  out  all  items  that 
balance  above  any  two  given  points  on  each  side  of  the  account,  whether  they  are 
on  the  same  line  or  not. 

94.  When  the  amounts  of  the  paper  received  are  entered  separately  on  the 
debit  side  of  the  account,  it  is  not  an  uncommon  custom  to  credit  the  paper,  when 
paid,  on  the  sanie  line  on  the  opposite  side  of  the  account.  This  method,  however, 
frequently  disarranges  the  account,  as  the  credit  items  may  not  appear  in  their 
chronological  ordex-,  thereby  making  the  account  more  difficult  to  audit. 

95.  When  the  amount  of  each  paper  is  entered  separately  and  the  debit 
side  of  the  account  becomes  full,  many  bookkeepers  prefer  to  enter  the  new  debit 
items  on  another  page,  leaving  the  old  account  open  until  all  the  debit  items  in 
that  account  are  credited,  the  account,  consequently,  balancing  up  to  that  point, 
rather  than  to  foot  and  rule  the  account  and  forward  the  balance.  This  method 
has  the  objections  referred  to  in  the  preceding  paragraph. 

96.  When  there  are  part  payments  received  on  the  same  note  or  acceptance 
two  or  more  entries  may  be  made  on  the  same  line. 

97.  Another  plan  is  to  check  the  canceling  items  on  both  sides  of  the  account 
as  the  entries  are  made  on  the  credit  side,  as  shown  in  illustration  15,  using  the  letters 
of  the  alphabet  to  indicate  corresponding  items.  The  unchecked  items  on  the  debit 
side  will  then  show  the  different  papers  on  hand  and  unpaid.  This  plan  is  excel- 
lent and  is  highly  recommended. 

98.  When  a  notes  receivable  book  is  kept  and  used  as  a  posting  medium, 
which  is  the  best  practice  under  all  circumstances,  only  the  total  amount  of  the  notes 
and  acceptances  received  during  the  month  appears  on  the  debit  side  of  the  ledger 
account,  as  shown  in  illustration  16.  If  a  special  column  for  "Notes  Receivable 
Cr.,"  is  kept  in  the  cash  book,  only  the  total  of  the  payments  received  on  notes 
and  acceptance  will  usually  appear  in  the  ledger  account,  as  ^hown  in  the  illustra- 
tion; otherwise, a  separate  credit  entry  is  requiredfor  each  note  or  acceptance  paid. 
When  a  notes  receivable  book  is  kept, the  suggestions  contained  in  1194,  ^95.  1|96 
and  1[97  do  not  apply. 


NOTES  RECEIVABLE  ACCOUNT 


29 


Illubtbation  16. 


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98a.  This  account  corresponds  with  accounts  receivable  account  (1[49, 
1154a)  except  that  it  shows  others'  loritten  promises  to  pay  instead  of  oral  promises 
to  pay.  The  balances  in  both  accounts  show  resources.  The  amounts  on  the 
debit  side  show  the  total  notes  and  acceptances  received  for  the  month,  "N" 
indicates  that  they  were  posted  from  the  note  book.  The  credit  items  show 
the  total  receipts  of  cash  in  payment  of  notes  and  acceptances  receivable  for  the 
month.  "C"  indicates  the  cash  book,  and  as  there  is  only  one  credit  item  for  the 
month,  it  indicates  that  a  special  column  with  "Notes  Receivable  Cr."  is  kept  in 
that  book.  The  account  is  shown  balanced  and  ruled,  ready  to  be  forwarded. 
Illustration  17  shows  the  account  opened  on  another  page  with  the  balance  trans- 
ferred. 


Illustration  17 


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Exercises  in  Notes  Receivable  Accounts 


99.  Prepare  the  ledger  accounts  for  the  following  examples,  applying  the  rule 
(1|84)  m  each  transaction.  Rule  out  the  items  that  balance  on  each  side  of  the 
account  as  the  balancing  credit  entries  are  made.  Follow  the  special  instructions 
for  each  example  carefully. 

(1)  The  transactions  in  George  Warren's  books  relating  to  notes  receivable  are 
as  follows: 

Feb.  1.  He  invests  in  the  business  William  Brown's  30-day  note,  dated 
Jan.  15,  for  $250.16;  also 'James  Dean's  60-day  acceptance,  dated  Jan.  13, for 
$311.17.  -  -  Feb.  5.  He  receives  from  R.M.Walters  his  note  at  30  days,  dated 
February  2,  for  $364;  also  H.  A.  Harvey's  acceptance  at  30  days,  dated  January 
28,  for  $276.50.  -  -  Feb.  10.  J.  Watkins  &  Co.  transfers  to  him  C.  N.  Laws' 
acceptance  at  30  days,  dated  Feb.  2,  for  $300,  to  apply  on  account.  -  -  Feb. 
14.  He  receives  payment  for  William  Brown's  note  of  Jan.  15,  $250.16.  (Rule 
out  balancing  items.)  -  -  Feb.  15.  He  transfers  H.  A.  Harvey's  acceptance 
of  Jan.  28  at  30  days  to  A.  C.  Hatfield,  to  apply  on  account,  $276.50.  -  -  Feb 
18.  He  had  James  Dean's  acceptance  of  Jan.  13  discounted  at  bank,  $311.17. 
-  -  Feb.  25.  R.  W.  Day  accepted  and  returned  his  draft  at  30  days  after  date 
for  $116.40.     -  •  - 


30  BOOKKEEPING   AND   ACCOUNTANCY 

What  is  the  balance  of  his  notes  receivable  account  February  28?  Indicate 
canceling  items  by  using  the  letters  alphabetically,  beginning  with  the  first  credit 
item. 

Louis  Bessler  &  Go's  notes  receivable  account  contains  entries  for  the 
following  transactions : 

July  1.  They  invested  four  notes  made  by  Rand  &  Co.,  all  dated  June  15, — 
one  at  30  days  for  $200,  one  at  40  days  for  $300,  one  at  50  days  for  $400,  and  one 

at  60  days  for  $376.18. July  6.     They  received  from  James  Ross,  on  account, 

his  acceptance  at  30  days    for  $275. July  IC.     They  received  in  payment 

for  merchandise  sold  to  Bennett  &  Sons  their  note  at  30  days  for  $275. 

July  12.     Charles  Adams  transferred  to  them  J.  Harman&  Co.'s  note,  dated  July  1, 

at  30  days,  to  apply  on  account,  $125. July  15.     They  received  cash  from 

Rand  &  Co.,  in  payment  of  note  of  June  15  at  30  days,  $200.     (Rule  out  balanc- 

ing  items.) July    18.     They   transferred  Rand  &  Co.'s  note  of  June  15    at 

40  davs  to  First  National  Bank  for  collection.  (No  entry  is  made  until  the  col- 
lection is  reported  by  the  bank.     (Read  82a.) July  20.     They  transferred 

James  Ross'  acceptance  of  July  6  to  Hatfield  Bros.,  to  apply  on  account,  $275. 

July  25.    The  First  National  Bank  notified  them  that  they  have  collected 

Rand  &  Co.'s  note  left  for  collection  July  18,  and  have  placed  the  amount  to  their 

credit,  $300 July  30.     They  had  Rand  &  Co.'s  note  at  60  days  discounted 

at  bank,  $376.18. July  31.     They  received  in  part  payment  of  J.  Harman 

&  Co.'s  note  of  July  1  at  30  days  $75. 

Indicate  canceling  items  as  previously  instructed. 

(3)  Jan.  1.  Redmond  Bros,  received  note  of  Arthur  Jones,  dated  Dec.  20 
at  30  days,  for  $650;  also  J.  M.  Pugh's  note,  dated  Dec.  8  at  60  days,  for  $700. 

Jan.  5.     They  received  Jones  &  Jones'  note,  dated  Jan.  1   at  30  days,  for 

$250;  they  also  received  Adams  Bros,  acceptance,  dated  Dec.  24   at  30  days,  for 

$236.75. Jan.  10.     W.  A.  Andrews  transferred  to  them  H.  A.  Kelly  &  Co.'s 

acceptance,  dated  Jan.  2  at  30  days,  for  $350,  to  apply  on  account. Jan.  19. 

They  received  cash  in  payment  of  Arthur  Jones'  note  of  Dec.  20  for  $650.     {Rule 

out  balancing  items  on  the  same  line.) Jan.  20.     They  had   J.  M.  Pugh's 

note  of  Dec,  8  discounted  at  bank,  receiving  credit  for  the  proceeds,  $700.     {Rule 

out  balancing  items.) Jan.  25.     They  transferred  Jones  &   Jones'   note  of 

Jan.  1,  for  $250  to  R.  M.  Wade  &  Co.  on  account.  {Rule  out  balancing  items.) 
Jan.  30.     Received  cash  of  H.  A.  Kelly  in  payment  of  his  acceptance,  $350. 

What  is  the  balance  shown  by  their  notes  receivable  account  Jan.  31? 
Indicate  canceling  items  as  heretofore  instructed. 

(4)  Transactions  relating  to  notes  receivable  in  the  books  of  Davis  &  Co. 
July  3.     Received  R.  B.  Small's  note,  dated  July  1    at  30  days,  on  account, 

^500;  also  Duncan  &  Kane's  note,  dated  June  8  at  30  days,  $450.  —  July  5. 
Received  from  W.  H.  Corwinon  account  his  note  dated  July  2  at  2  months,  $159.38. 
—  July  6.     Received  from  D.  A.  Davidson,  to  balance  account,  his  note  dated 

July  3   at  30  days,  $237.45. July  6.     R.  B.  Small  prepaid  his  note  in  cash, 

$500.     (Rule) July  7.     Received  from  J.  A.  Oilman  our  draft  of  July 3, 


MEDIUMS   OF   EXCHANGE — NOTKS   PAYABLE  31 

on  him  at  30  days'  sight,  which  he  returns  accepted  July  6,  $376.50. July 

8.     Received  Duncan  &  Kane's  check  in  payment  of  their  note,  due  today,  $450. 

July  9.     Received  from  A.B.Jones  his  note  at  30  days,  in  full  of  account, 

$300.     -  -    July  11.     Sold  G.  A.  Mann  &  Co.,  for  their  note  at  30  days,   mer- 
chandise, $574.50. July  15.     Received  from  E.  Norton  his  draft  in  our  favor 

at  30  days'  sight,  on  W.  W.  Colburn,  which  was  accepted  July  15,  $458.47.  - 
July  18.     Received  from  F.  R.  Perkinshis  note  at  30  days,  on  which  we  loaned  him 
cash,  $400. 

(5)  Adam  Ross,  conducting  an  installment  business,  receives  the  following  notes : 

Aug.  2,  note  from  A  for  $100,  dated  Aug.  1,  payable  $10  per  month;  note  from 

B  for  $50,  dated  Aug.  1,  payable  $5  per  month;  note  from  C  for  $60,  dated  Aug.  1, 

payable  $6  per  month. Sept.  1.     A,  B,  &  C  pay  their  installments.     Oct.  1. 

A  &  C  pay  their  installments. Nov.  1.     He  received  note  from  D  for  $36, 

payable  $4  per  month. Nov.  2.     B  &  C  pay  all  installments  to  date. 

Dec.  1.     A,  B,  C  &  D  pay  all  installments  due  to  date. 


Use  letters  of  alphabet  to  denote  payments  applying  against  their  respecti 
IS.     What  is  the  balance  shown  by  the  account? 


When  these  accounts  have  been  carefully  prepared,  submit  them  for  approval. 


NOTES.  PAYABLE  ACCOUNT. 

100.  Notes  payable  account  is  one  of  the  class  in  which  items  relating  to 
mediums  of  exchange  are  recorded.     (11216,  1123,  1[78) 

101.  Notes  payable  consist  of  our  own  notes  and  of  accepted  drafts  (accept- 
ances) the  value  of  which  we  are  obligated  to  pay  when  due.     (1[77) 

102.  The  object  of  this  account  is  to  show  (a)  the  amount  of  our  notes  and 
acceptances  issued  to  others ,  (6)  the  amount  of  these  notes  and  acceptances  which 
have  been  redeemed  by  and  returned  to  us,  and  (c)  the  amount  we  still  owe  on 
outstanding  notes  and  acceptances  at  any  date,  which  is  a  liability. 

103.  Bonds  or  mortgages  payable  should  not  be  included  in  the  ordinary 
notes  payable  account,  but  should  be  kept  in  separate  accounts,  under  appropriate 
titles.  Likewise  bonds  and  mortgages  receivable  should  be  kept  in  separate  ac- 
counts. Not  infrequently  the  account  for  such  securities  is  kept  under  the  title 
"Bonds  and  Mortgages  Receivable,"  or  "Bonds  and  Mortgages  Payable." 

104.  All  items  that  appear  on  the  debit  side  of  this  account  must  first 
appear  on  the  credit  side,  because  our  obligations  to  pay  must  be  issued  before  they 

•  can  be  redeemed. 


32  bookkeeping  and  accountancy 

Rule  for  Debiting  and  Crediting  Notes  Payable  Account. 

105.     Debit  what  is  received:  credit  what  is  given. 

105a.     Debit   notes   payable    (at    face  1056.     Credit   notes    payable    (at  face 

value)— for  our  notes  and  acceptances  re-  value)— for  our  notes  and  acceptances  given 

ceived  (paid  and  redeemed).  (issued). 

106.  The  various  applications  of  the  rule  for  debiting  and  crediting  notes 
payable  are  as  follows. 

107.     Debit  notes  payable  account  (at  face  108.     Credit  notes  payable  account  (at  face 

value),—  value  — 

a.     For  all  our  notes  and  acceptances  when  c.     For  all  notes  and  acceptances  held  by 

paid  or  redeemed  and  received  back  by  others  against  us  at  the  beginning  of 

^g  business. 

r      For  all  part  payments  made  on  note  d.     For  all  our  notes  given  (issued)  and  for 

and  acceptances  issued  by  us.  all  drafts  accepted  by  us  in  favor  of  oth- 
ers. 

109.     Observe   that  in  every  instance  110.     Observe  that  in  every  instance 

notes    payable    account  is  debited  for  the  notes  payable  account  is  credited  for  the 

amount  of  our  own  notes  and  acceptances  amount  of  our  own  notes  and  acceptances 

when  paid,  redeemed  and  received  back  by  issued  or  giveyi  out  to  others  by  us;  hence  the 

us;  hence  the  rule.  ''^l^- 

111.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 
for  Debiting  and  Crediting  Notes  Payable  Account. 

Jan  1  FA.  Raymond  owed  on  his  note,  in  favor  of  R.  S.  Walters  &  Co.,  due 
Jan.  16,  '$200.  (11108c)  -  -  Jan.  4.  He  gave  his  note  at  20  days  to  Peterson 
&  Co.,  on  account,  $633.45.  (IJlOSd)  -  -  Jan.  9.  He  accepted  Rich  &  Hart- 
ley's draft  at  10  days'  sight  for  $89.73  in  full  of  account  mOSd)  --Jan. 
16      He  gave  his  note  to  Alex.  Chester  Sons  at  30  days  m  full  of  account,  $1,137.68. 

Jan.   19.     He  paid  his  acceptance  of  Jan.    9  in  cash,   $89.73.      (11107a) 

Jan    21.     He  accepted  Brown  Bros,  draft,  in  their  own   favor,  at  10  days, 

in  full  of  account,  $113.39.  -  -  Jan.  24.  He  gave  Bennett  &  Sons  his  note  at 
30  days  on  account,  $150.  On  the  same  date  he  paid  his  note,  issued  Jan.  4,  due 
today  $633  45  -  -  Jan.  26.  He  paid  his  note,  due  today,  in  cash,  $200.  (Ride 
out  balancing  items.)  (1[116)  -  -  Jan.  30.  He  accepted  J.  H.  Van.  Sickle's 
draft  at  30  days,  in  full  of  account,  $212.32.  -  -  Jan.  31.  He  paid  acceptance 
of  Jan.  21,  $113.39. 

What  is  the  balance  shown  by  the  account  Jan.  31? 

11  la.  Prepare  a  ledger  account  for  the  above  transactions,  as  instructed  in 
90a  applying  the  rule  (11105)  in  detp.rmining  the  proper  entries.  Indicate  cancel- 
ing items.  Prove  the  account  by  seeing  that  the  sum  of  the  unchecked  items  equals 
the  balance,  and  submit  for  approval. 


NOTES  PAYABLE  ACCOUNT 


33 


Illustration  18. 


7Z<^€Z<d.-'-/^^i^Y^cz^^'^^^ 


1116.  The  illustration  shows  the  account  as  it  appears  Jan.  3 1 ,  with  the  figures 
in  the  posting  columns  omitted.  The  small  figures  showing  the  footings  and  the 
balance  of  the  account  are  pencil  figures  which  are  inserted  when  the  trial  balance 
is  taken.  (^[406).  Notice  that  the  first  three  items  on  each  side  of  the  account 
are  canceling  items  and  are  ruled  out  (^114)  after  the  third  entry  on  the  debit  side 
of  the  account  is  made.  They  could  also  be  indicated  by  letter,  as  is  illustrated  for 
the  canceling  items  marked  "a,  a. "  The  sum  of  the  uncanceled  items  should  equal 
the  balance  of  the  account.     (^115). 

112.  The  difference  between  the  two  sides  of  the  notes  payable  account  (if 
any)  will  show  the  amount  of  our  notes  and  acceptances  outstanding,  which  is  a 
liability  that  should  be  included  in  the  statement  of  resources  and  liabilities  (see 
93) .  All  items  must  first  appear  on  the  credit  side  of  the  account.  The  sum  of  the 
notes  and  acceptances  outstanding  must  equal  the  balance  showTi  by  the  account. 

113.  To  close.  Notes  payable  account  should  never  be  closed  unless  the 
account  balances,  except  when  it  is  necessary  to  forward  the  account  to  another 
page,  when  the  balance  should  be  entered  in  red  ink  and  forwarded  in  black  ink 
on  the  opposite  side  of  the  page.     (^116a) 

114.  When  all  items  balance  above  a  given  point  they  may  be  "ruled  out,' ' 
as  shown  in  illustration  18.  (^1116)  It  is  the  general  practice  to  rule  out  all 
items  that  balance  above  any  two  given  points  on  each  side  of  the  account,  whether 
they  are  on  the  same  line  or  not. 

115.  When  the  amounts  of  paper  issued  are  entered  separately  on  the  credit 
side  of  the  account,  each  item,  wiien  paid,  may  be  debited  on  the  same  line  on  the 
opposite  side  of  the  account.  This  method  has  objectionable  features.  (1[94) 
When  the  credit  side  of  the  account  becomes  full  it  is  generally  preferable  to  open 
the  new  account  as  suggested  for  notes  receivable.  (1195)  When  part  payments 
are  made  on  the  same  note  or  acceptance,  two  or  more  entries  may  be  made  on  the 
same  line.  As  the  entries  showing  full  payment  are  made  on  the  debit  side,  the 
amounts  may  be  canceled  on  both  sides  of  the  account.  (See  a,  a)  The 
uncanceled  items  on  the  credit  side  show  the  different  papers  outstanding  and 
unpaid.     (1[llla) 


34 


BOOKKEEPING   AND   ACCOUNTANCY 


116.  When  a  notes  payable  book  is  kept  and  used  as  a  posting  medium,  which 
is  the  best  practice,  only  the  total  amount  of  the  notes  and  acceptances  issued  for 
i.he  month  will  appear  in  the  ledger  account,  as  sho'mi  in  illustration  19.  "When  a 
special  column  for  "Notes  Payable  Dr."  is  kept  in  the  cash  book,  only  the  total 
amount  of  our  notes  and  acceptances  redeemed  for  the  month  will  usually  be  shown 
in  the  ledger  account;  otherwise  the  amomit  of  each  note  or  acceptance  paid  will 
appear  separately  on  the  debit  side  of  the  account. 


Illustration  19. 


116a.  Notes  payable  account  corresponds  with  accounts  payable  account 
(1150)  except  that  it  shows  our  written  promises  to  pay  instead  of  oral  promises  to 
pay.  The  balances  in  both  accounts  show  liabilities.  The  illustration  above  shows 
the  account  as  it  appears  when  the  notes  payable  book  is  used  as  a  posting  medium 
and  a  special  column  for  "Notes  Payable  Dr."  is  kept  in  the  cash  book. 
On  the  opposite  page  the  account  is  shown  with  the  balance  transferred.     (1[113). 


Ili-Dstration  20. 


-   Pz^p-i^ii^^'''/-^^^^^d^^ 


-^i^i^. 


-A        y^-" 


Exercises  in  Notes  Payable  Accounts. 


117.  Prepare  the  ledger  accounts  for  the  following  examples,  appljang  the 
rule  (*|105)  in  each  transaction.  Rule  out  the  items  that  balance  on  each  side  of 
the  account  as  the  balancing  debit  entries  are  made.  Follow  carefully  the  special 
lOstructionB  for  indicating  the  canceling  items. 


EXERCISES   IN    NOTES   PAYABLE  35 

(1)     The  transactions  in  Brown  Bros.  &  Co.'s  books  relating  to  notes  payable 
are  as  follows: 

Jan.  1.     Gave  J.  Doris  note  at   10  days,  on  account,   $280. Jan.  6. 

Accepted  Charles  Paxton's  draft  dated  Dec.  30  at  30  days  after  date,  for  $316.40 

Jan.   11.     Paid  note  in  favor  of  J.  Doris,  $280.     {Rule) Jan.   12. 

Gave  Jas.  Davis  our  note  at  30  da^'s  for  $328  in  full  of  account. Jan.  19. 

Made  part  payment  on  our  acceptance  of  Jan.  6,  $200.     (111076) Jan.  21, 

Gave  E.  N.  Ray,  note  at  30  days,  in  full  of  account,  $276.14. Jan.  22.     Paid 

balance  due  on  our  acceptance  of  Jan.  6,  $116.40. 


31. 


Indicate  canceling  Items  (^1116)  and  show  the  balance  of  the  account,  Jan. 

(2)  March  1.     Frank  Brown  began  business,  owing  the  following  notes: 

Note  in  favor  of  John  Bentz,  dated  Feb.  16  at  30  days  for  $847.19;  note 
in  favor  of  Gard  Mfg.    Co.,  dated  Feb.  25  at  00  days,  $540.16;  note  in   favor 

of  the  City  National  Bank,  dated  Feb.  15,  payable  on  demand,  for  $2,000. 

March  5.     He  gave  his  note  at  30  days  to  Gard  Mfg.  Co.  for  $350.75. March  6. 

He  accepted  Knight  &  Day's  draft  at  30  days'  sight  for  $219.54.  -  -  March  9.     He 

accepted  Maxwell  &  Co.'s  draft  at  60  days,  for  $685.20. March  10.     He  made 

part  payment  on  note  held  by  City  National  Bank,  $500.  -  --  March  18. 
He  took  up  note  in  favor  of  John  Bentz,  dated  Feb.  16,  by  giving  him  cash  $500, 
and  a  new    note  at  30  days  for  $347.19     (Debit  the  account  for  the   old  note; 

credit  it  for   the   new   note.) March  18.     He  made  part  payment  on  note 

held  by  the  City  National  Bank,  $500. March  25.     He  sold  merchandise  to 

Gard  Mfg.    Co.,  who   transferred  back  to  him  his  note  of  March  5  at  30  days  for 

$350.75,  in  part  payment.     (^107a) March  30.     He  paid  note  in  full  held 

by  City  National  Bank,  $1,000. 

Indicate  canceling  items  by  letter.     (1[115) 

(3)  Jan.  1.  Robinson  &  Kennedy  enter  into  a  partnership,  bringing  into  it 
all  the  resources  and  liabilities  of  their  former  separate  businesses.  Robinson 
owed  a  note,  dated  Dec.  15  at  30  days  in  favor  of  A.  C.  Boyd,  for  $275.  (^108c) 
Kennedy  owed  a  note  dated  Dec.  20  at  60  days  in  favor  of  J.  M.  Byrnes 
for  $300;  also  his  acceptance  of  Dec.  10  at  30  days  in  favor  of  Boyd  &  Johnson 

for  $116.42. Jan.  5.     They  borrowed  from  the   Merchants   National  Bank 

on  their  note  payable  on  demand,  $5,000. Jan.  8.     They  issued  their  note 

at  40  days  to  Andrews  &  Co.,  for  merchandise,  $257.10 Jan.   10.     They 

accepted  Jones  &  Go's  draft  at  10  days'  sight  for  $278.19. Jan.  10.     They 

paid  their  acceptance  in  favor  of  Boyd  &  Johnson,  $116.42. Jan.  14.     They 

paid  their  note  in  favor  of  A    C.  Boyd,  dated  Dec.  15,  for  $275. Jan.  15. 

They  paid  the  Merchants  National  Bank  $500,  to  apply  on  their  note  issued  Jan. 

5. Jan.  20.     J.  M.  BjTues  transferred  to  them  Kennedy's  note  of  Dec.  20,  for 

$300,  in  part  paymxent  of  goods  sold  him  that  day. Jan.  26.     They  accepted 

W.  N.  Davidson's  draft  at  30  days  for  $398.     -  -  Jan.  28.     They  made  a  payment 

on  the  note  issued  Jan.  5  in  favor  of  the  Merchants  National  Bank,  $1,000. 

Jan.  30.  They  took  up  their  demand  note  issued  Jan.  5  in  favor  of  the  Merchants 
National  Bank,  by  paying  the  balance  in  cash. 


36  BOOKKEEPING    AND   ACCOUNTANCY 

Indicate  canceling  items  by  letter,  beginning  with  the  first  debit  item.  To 
find  the  balance  due  on  note  in  favor  of  the  Merchants  National  Bank,  indicate 
the  payments  on  Jan.  15  and  Jan.  28,  "t/,  d. "  Where  the  entry  for  the  full  pay- 
ment of  the  note  is  made  on  Jan.  31,  indicate  that  item  and  the  credit  entry  of 
Jan.  5  with  the  same  letter.  By  this  method  the  account  will  show  the  three  items 
on  the  debit  side  that  cancel  the  one  item  on  the  credit  side  of  the  account.  Show 
the  balance  of  the  account  on  Jan.  31. 


(4)  John  Adams  had  notes  and  acceptances  outstanding  at  the  beginning  of 
business,  June  1,  as  follows: 

June  1.  A  note  dated  May  10  at  30  days  in  favor  of  Anson  Byrd  &  Co., 
for  $200;  a  note  dated  May  20  at  40  days  in  favor  of  Anson  Byrd  &  Co.,  for 
$165.40;  an  acceptance  dated  May  15  at  60  days  in  favor  of  Calhoun  &  Co., 
$316.20;  and  an  acceptance  dated  May  27  at  15  days  in  favor  of  Wells  &  Wright, 
for  $95.40.  These  were  all  issued  in  payment  of  bills  purchased  to  begin  business. 
The  following  transactions  occurred  during  the  month : 

June  5.     Accepted  Vermont  Stone  Co's  draft  at  30  days'  sight,  $187.60. 

June  9.     Took  up  note  of  May  10  in  favor  of  Anson  Byrd  &  Co.,  for  $200, 

by  paying  $100  in  cash  and  issuing  a  new  note  at  10  days  for  $100. June 

11.     Paid  acceptance  in  favor  of  Wells  &  Wright,  due  today,  $95.40. June 

19.  Paid  note  issued  June  9,  for  $100.  -  -  June  29.  Paid  note  of  May  20 
in  favor  of  Anson  Byi'd  &  Co.,  $165.40.  -  -  June  30.  The  Vermont  Stone  Co. 
returned  acceptance  of  June  5  in  part  payment  of  goods  purchased. 

Follow  previous  instructions. 

(5)  Aug.  1.    On  commencing  business,  John  Thompson  owed  an  acceptance 

due  Aug.  16  in  favor  of  J.  L.  Soule,  for  $525. Aug.  2.     He  issued  note   at 

30  days  to  G.  H.  Mann,  for  $350.    -  -  Aug.  15.     He  accepted  E.   H.   Davis' 

draft  at  30  days'  sight  in  favor  of  H.  K.  Moore,  for  $196.34. Aug.  16.     He 

paid  acceptance  in  favor  of  J.  L.  Soule.  -  -  Aug.  17.  He  accepted  M.  M. 
Brown's  draft  at  10  days'  sight  in  favor  of  J.  V.  Chase,  for  $257.43.  -  -  Aug. 
27.  He  paid  his  acceptance  due  that  day.  -  -  Aug.  28.  He  received  from  W. 
J.  Tucker,  on  account,  his  note  issued  Aug.  2  to  G.  H.  Mann. 


What  was  the  balance  shown  by  his  notes  payable  account,   Aug.  31? 

On  Sept.  3,  Mr.  Thompson  accepted  a  draft  at  10  days'  sight  $150.  He  paid 
this  and  his  acceptance  of  Aug.  15  at  maturity.  Make  the  proper  entries  under 
the  proper  dates,  and  show  the  account  closed  and  ruled  as  it  would  appear 
Sept.  30.     (11113). 


MEDIUMS    OP   EXCHANGE — CASH   ACCOUNT  37 

CASH  ACCOUNT. 

118.  Cash  includes  gold,  silver,  and  coins,  bank  notes,  U.  S.  Treasury  notes, 
money  orders,  bank  drafts,  checks,  and  whatever  else  is  received  or  given  as  money. 
Cash  is  the  most  important  of  the  mediums  of  exchange.     (1[21) 

119.  The  object  of  this  account  is  to  show  the  receipts  andpayments  of  cash, 
and  from  these  to  ascertain  the  amount  of  cash  that  should  he  on  hand.     (1123) 

119a.  ''On  hand"  includes  the  cash  in  the  safe  or  drawer,  to  which  must  be 
added  the  balance  in  bank  shown  by  the  check  book,  or  by  the  "check  and  deposit 
book. "  When  accounts  are  kept  in  more  than  one  bank,  the  sum  of  the  balances 
must  be  added  to  the  cash  in  safe  or  drawer.  When  a  separate  ledger  account  is 
kept  with  the  bank,  "cash  on  hand"  includes  only  the  actual  cash  in  the  safe 
or  drawer.     Ledger  accounts  with  banks  are  seldom  kept. 

120.  The  cash  account  is  seldom  kept  in  the  ledger  but  is  kept  in  a  separate 
cash  book  in  which  the  entries  for  all  receipts  and  paj^nents  of  cash  are  made  and 
from  which  they  are  posted  to  the  proper  accounts  in  the  ledger.  When  the  cash 
book  is  kept,  no  cash  items  are  entered  in  any  other  book. 


Rule  for  Debiting  and  Crediting  Cash  Account. 


121.  Debit  what  is  received:  credit  what  is  given. 

121a.     Debit  cash  when  received.  1226.     Credit  cash  when  given. 

(Debit  for  receipts.)  (Credit  for  payments.) 

122.  The  various  applications  of  the  rule  are  few,  and  are  as  follows: 

123.     Debit  cash  account,—  124.     Credit  cash  account,— 

a.  For  the  amount  of  cash  invested  in  the  c.      For  all  cash  paid  out. 

business.  d.     For  all  cash  loaned  to  others  or  lost. 

b.  For  all  cash  received  thereafter.  e.     For  all  checks   issued    (when  no  bank 

account  is  kept  in  the  ledger). 
/.      When  a  bank  account  is  kept,  for  all 
cash  deposited. 

125.     Observe  that  in  every  instance  126.     Observe  that  in  every  instance  the 

the  account  is  debited  for  the  amount  of  account  is  credited  for  the  amount  of   cash 

cash  received  (receipts).  given  (payments). 


38 


BOOKKEEPING    AND   ACCOUNTANCY 


Illustration  21. 


.^j^^a<i.'A''n:£^c.£.^^^6)^ 


— 7"7n — 

s- 

I  / 

\f 

/• 


C^^l^, 


^2J^ 


/^H;t.£-£i.^>-T^-c-e~^ 


2 


/fs/  \ 

&7   f¥, 


//v 


Z^"/"/ 


2  2-,. 


-2./ 


7^// 


2^ 


127.     Transactions  Illustrating  the  Various  Applications  of  the  Rulb 
(Tfl2)  FOR  Debiting  and  Crediting  Cash  Account. 

F.  A.  Raymond's  cash  transactions  are  as  follows: 

Jan.  1.     He  invested  cash,  $5,000.     (11123a) Jan.  3.     He  paid  Sharp 

&  Co.'s  coal  bill,  $16.     (11124c)     -  -  Jan.  4.     He  paid  John  Ward  for  bill  of  Dec. 

26,  $496.75. Jan.  5.     He  received  cash  from  R.  J.  Maclean  &  Co.  on  account, 

$100  (1[1236) JAn.  6.     *He  paid  cash  for  blank  books  and  stationery,  $21.50 

(1[124c) Jan.  8.     He  received  cash  from  H.  B.  Wilson,  for  billof  Jan.  2,  $361.02 

Jan.  9.     He  received  cash  from  Jamison  &  Fox,  to  apply  on  bill  of  Jan.  4, 

$75. Jan.  10.     He  paid  freight  bill  on  goods  purchased,  in  cash,  $7.66. 

Jan.  11.     He  received  cash  in  payment  of  Dennis  Bros,  note,  $212.50;  he  also 

receivedcashinpaymentof  interest  on  the  same,  $2.13. Jan.  12.     Hereceived 

cash  for  cashsales  of  goods,  $17.65.     On  the  same  day  he  paid  for  stamped  envelopes 

$3  20 Jan.  14.     He  received  cash  of  Archer  &  Lane,  for  bill  of  Jan.  8,  $427.38. 

-  -  Jan.  15.      He  paid  W.  J.  Brown  for  his  bill  of  Jan.  4,  $987.50.     -  -  Jan.  19. 

He  received  cash  from  White  &  Gates  Co.,  in  full  of  account,  $19.31. Jan.  19. 

He  paid  his  note  in  favor  of  Gill  &  Co.,  $350,  and  interest  on  the  same  $1.75. 

Jan.  21.     He  received  cashfrom  Jamison  &  Fox,  infull  for  bill  of  Jan.  4,  $67.94. 

Jan.  25.     He  received  payment  of  Archer  &  Go's  note,  $114.22. Jan.  27. 

He  paid  cash  to  Waters  &  Smith,  for  bill  of  Dec.  27,  $2,491.48.     -  -  Jan.  27.     He 

received  cash  from  A.  M.  Peters  on  account,  $200. Jan.  30.     He  paid  rent 

for  January,  $125. Jan.  30.     He  borrowed  on  his  note    at  30  days,  $500. 

Jan.  31.     He  paid  salesmen's  salaries  in  cash,  $80;  warehouse  labor,  $22.10; 

and  he  withdrew  for  his  personal  use,  $50. 

What  should  be  the  balance  of  cash  on  hand  Jan.  31? 
*"Ad.  Expense"  is  the  abbreviation  for  administration  expense. 


THE    CASH    ACCOUNT 


39 


^'<!^^C^-<:i'^'-'T^,yt^^7^7^L.^^^yT^Z2 


Ux'n^ 


3_ 

i  C 

\/e> 
\/2. 

3/ 
13/ 

L// 

\.7 


/3£^i'T-i'^.-£'t^-!'-^%.d^i^a^Cc.^y-t.£', 


'-y 


^0  L 


MSZ. 


M=^ 


I27a.  Prepare  a  cash  book  account  for  the  above  transactions  on  journal  paper, 
as  follows: 

(1)  Read  and  study  each  transaction  carefully. 

(2)  Read  the  special  application  for  each  transaction  of  the  rule  for  debiting 
or  crediting  cash  account,  indicated    by  the  paragraph  number. 

(3)  Study  carefully  the  information  contained  in  paragraphs  ^128  to  ^128c 
following  illustration  21. 

(4)  Apply  the  rule  (1[121)  and  make  the  proper  debit  and  credit  entries  in  the 
cash  book,  as  shown  in  illustration  21,  referring  to  the  illustration  to  determine 
the  proper  accounts  to  be  named  in  connection  with  each  debit  and  credit  item. 
When  completed,  submit  for  approval. 

128.  The  cash  book  in  addition  to  the  columns  for  the  date,  the  posting 
figures,  and  the  amount  of  each  item  shown  in  an  ordinary  account,  contains  two 
additional  columns  on  each  side — one  for  the  name  of  the  opposite,  or  contra,  account 
affected,  and  another  for  an  explanation  of  the  item. 

128a.  All  items  of  cash  received  and  entered  on  the  debit  (left)  side  of  the 
cash  book  are  posted  to  the  credit  side  of  the  ledger  account  named. 

1286.  All  items  of  cash  paid  out  and  entered  on  the  credit  (right)  side  of  the 
cash  book  are  posted  to  the  debit  side  of  the  ledger  account  named. 

128c.  The  cash  book  may  and  usually  does  contain  a  number  of  columns 
that  greatly  reduce  the  work  of  the  booklceeper,  facilitate  posting,  and  guard 
against  errors.  Their  use  also  assists  in  the  analysis  of  receipts  and  payments, 
which  is  of  great  value  in  an  audit.  The  use  of  special  colums  is  explained  elsewhere 
in  this  work. 


40  BOOKKEEPING   AND   ACCOUNTANCY 

To  Close  Cash  Account. 

129.  The  difference  (if  any)  between  the  two  sides  of  the  cash  account  will 
alwaj's  show  a  debit  balance  which  should  equal  the  amount  of  cash  on  hand,  which  is 
a  resource  that  should  be  included  in  the  statement  of  resources  and  liabilities. 
The  credit  side  of  the  account  can  neve^  be  the  larger  since  it  is  impossible  to  pay 
out  more  cash  than  is  received. 

129a.  The  credit  side  may  be  made  the  larger  by  "overchecking"  on  the 
bank,  but  this  is  a  violation  of  banking  rules,  and  the  account  should  never  be 
closed  showing  an  overdraft. 

1296.  It  sometimes  happens  that  a  bank  account  will  show  an  over-draft 
caused  by  checks  which  are  issued  to  parties  residing  at  a  distance  and  which  conse- 
quently ,will  not  reach  the  bank  on  which  they  are  drawn  foi  paj-ment  for  a  consider- 
able time.     In  such  cases  the  cash  account  will  show  a  credit  balance. 

130.  To  close.  Find  the  difference.  Then  enter  on  the  credit  side  in  red 
ink  (1)  the  amount  of  the  difference,  (2)  the  date  and  (3)  the  word  "Balance." 
Then  rule  and  foot  the  account  as  show^l  in  illustration  21  and  bring  down  the 
balance  on  the  opposite  side  (in  black  ink),  entering  the  date  of  the  next  business day- 

Exercises  in  Cash  Accounts. 

131.  Prepare  cash  book  accounts  for  the  following  examples,  applj'ing  the 
rule  (^121)  in  each  transaction.  The  w^ords  in  italics  in  each  transaction  indicate 
the  names  of  the  accounts  affected  (•[128).  Be  careful  to  make  the  explanation 
complete.  After  the  entries  are  made,  balance,  rule  and  foot  each  example,  and 
bring  the  balance  down  on  the  opposite  side-   When  completed,  present  for  approval. 

1.     G.  R.  Oilman's  receipts  and  payments  of  cash  are  as  follows: 

April  1.     G.  i2.  Gt7man  invests  $3,000. April  3,   He  paid /f.  Z).  Pogfe,  for 

bill  of  March  26,  SI  15.25.     —  April  4.    He  received  from  Charles  Clark,  on  account, 

$35. April  5.     He  paid  coal  bill  of  April  3,  $16,  which  is  a  general  expense. 

April  8.     He  received  cash  from  H.  M.  Brown  for  bill  sold  ]\Iarch  6,  $76.40. 

April  9.     He  paid  John  M.  Ward    in  full  of  account,  $36.85. April 

10.       He  received  from  cash  sales,  $22.50. April  15.     He  paid  McClellan 

&  Co.   for  office  books  and  stationery,  which  is  an  administration  expense,  $26.70. 

April  21.     He  received  cash  in   payment  of  WiUiam  Gray's  note,  which 

affects  notes  receivable  account,   $314.32. April      23.     He  received   from 

Reynolds  Bros,    for  bill  sold  Feb.  26,  $50. April  26.     He  received  from 

Sharp  &  Co.    in  full  of  account  to  date,  $36.12. April  26.     He  paid  for 

cleaning  the  office  windows,  which  is  a  general  expense,  $1.15. April  29. 

He  received  from  B.  F.  Cole    for  bill  of  April  15,  $116.45. April  30.     He 

received  from  cash  saZes,  $135.35. April  30.     Hepaidfor  stamps,  $3;  pencils, 

?2;  telegrams,  $5;  salary  of  bookkeeper.  $50;  which  are  administration  expenses^ 


TRADING   ACCOUNTS — MERCHANDISE  41 

What  is  the  balance  of  cash  which  should  be  on  hand  or  in  bank,  April  30? 
If  $2,500  has  been  deposited  in  bank,  how  much  should  be  in  the  cash  drawer? 

2.     The  following  transactions  are  taken  from  the  books  of  H.C.Shepard&  Co. 

Sept.   1.     H.   C.  Shepard  invested  $6,000;  M.  A.  Shepard,   $1,000.     -  - 

Sept  3.     Purchases  for  cash  were  $61.75. Sept.  4.     Cash  sales  were  $42.85. 

Sept.  6.      Cash  sales  were  $36.70. Sept.  7.     Paid  Hennj  Smith,  on 

account,  $200. Sept.  8.     Received  from  William  Wright,  for  bill  of  July  6, 

$212.35. Sept.  10.     Paid  for  insurance  on  stock,  which  is  a  general  expense, 

$48;  received  from  T^.  5.  Page,  for  bill  of  Sept.  5,  $137.25.     -  -  Sept.  11.     Received 

payment  for  H.  M.  Jones'  note  {notes  receivable)  $200. Sept  11.     Paid  cash 

for  advertising  bill,  which  is  a  sales  expense,  $13.50. Sept.  12.     Paid  cash 

for  bill  heads,  which  is  an  administration  expense,  $6. Sept.  13.     Paid  note 

{notes  paijahle)  due  today  at  bank,  $250. Sept.  16.     Received  from  James 

Harris,  cash  for  bill  of  August  15,  $457.19. Sept.  18.     Paid  Henry  Wilson 

for  bills  of  Sept.  7  and  13,  $498.20. 

What  were  the  total  receipts  of  cash,  the  total  payments,  and  the  balance  on 
hand?  If  all  cash  received  was  deposited  in  bank,  and  all  payments  made  by  check 
what  should  be  the  balance  of  cash  in  bank? 

131a.  Find  the  results  for  the  following  transactions  arithmetically,  placing 
the  receipts  in  one  column  and  the  payments  in  another.  It  is  unnecessary  to  pre- 
pare a  cash  book  form. 

1.  Jan.  1.  Levi  Price  and  John  G.  Price  each  invested  $2,000.  -  -  2.  Advanced 
WilHam  Brown  for  traveUng  expenses,  $50.  -  -  4.  Received  from  William  H.Walker 
for  bill  of  Jan.  3,  $353 .09.     -  -  6.    Paid  C.  W.  Perkins  for  bill  of  Dec.  27,  $651.  75 ; 

also  paid  for  books  and  stationery,  $23.50. 8.    Received  from  D.H.Gordon,  on 

account,  $250. 9.    PaidFrankMorrison,  onaccount  of  billof  Jan.3,$540. 

12.    Received  from  John  Mitchell,  to  apply  on  account,  $150. 15.    Paid  rent 

for  Jan.  ,$60. 17.    Received  from  F.  P.  Draper,  in  payment  of  bills  of  Dec.  26 

and  Jan.  3,  $343.12.  --18.  Paid  G.  B.  Dean  &  Co.,  for  billof  Jan.  17,  $542.  -- 
19.  Received  from  C.  T.  Richardson,  in  full  of  account  to  Jan.  12,  $197.23.  -  -25. 
Levi  Price  withdrew  $60  for  personal  use,  and  John  G.  Price  withdrew  $100  for  per- 
sonal use. 26.  Received  from  Frank  Young,  in  payment  of  his  note,  due  to- 
day, $100.  -  -  27.  Paid  John  Safer,  in  full  of  account,  $614.21.  -  -  31.  Cash 
sales,  $161.27.  -  -  31.  Paid  for  janitor  service,  $15;  coal  bill,  $7.50;  salaries  of 
bookkeeper,  $45,  stenographer,  .$36. 

What  should  be  the  balance  of  cash  on  hand  January  31?  If  all  sums  received 
were  deposited,  except  cash  sales  of  January  31,  and  all  payments  made  by  check 
except  those  of  January  31,  how  much  cash  should  be  in  the  cash  drawer  and 
how  much  in  bank? 

2.    Jan.  1.    Joseph  Franklin  invested  $5,000. 2.   Bought  two  tons  of  coal 

for  cash,  $13. 2.    Received  from  Willis  Bros.,  in  payment  of  bill  of  Dec.  26, 

$362.50.    -  -  3.    W.  B.  Weeks  paid  his  note  due  today,  $300;  and  interest,  $3.00 


42  BOOKKEEPING   AND   ACCOUNTANCY 

-    -  4.    Paid  Wells  &  Eay  for  their  bill  of  Dec.  27,  $259.17.    -  -  4.    Paid  for 

printing  letter  heads  and  envelopes,  $12. 4.    Cash  sales,  $21.36.     -  -  5. 

Bought  merchandise   for  cash,  $86.15    -  -  7.     Received  from  Harry  Arnold, 

payment  in  full  of  accomit,  $388.09. 9.    Bought  new  desk  from  Keeler  &  Co., 

$45.     -  -  9.     Paid  Ratcliffe  Co.,  for  boxes,  $32.15.     -  -10.    Cash  sales,  $17.14; 
also  received  from  A.  G.  Osgood,  in  paj-ment  of  bill  of  Jan.  3,  $185.17.     -  -  11. 

Paid  incoming  freight  and  express  bills,  $38.56. 12.     Bought  two  horses, 

wagon  and  harness,  complete,  from  Adams  Bros.,  for  $350. 13.    Paid  for  hay 

$6;  straw,  $3.50. 13.    Received  from  R.  A.  Walters,  in  full  of  account,  $218.60; 

also  received  payment  of  Dilworth  Bros,  note,  due  today,  $468.18;  and  interest, 

$7.02. 15.     Cash  sales,  $17.05. 15.     Received  from  Russell  Bros.,  on 

account,  $100. 18.    Paid  interest  on  note  at  bank,  $15. 18.    Paid  for 

repairson  wagon,  $4.50. 20.    Cash  sales.  $14.85.     — 21.    Received  from  John 

Richards,  on  account,  $45.     — 22.    Paid  gas  bill,  $10.85;  also  advertising  bill, 
$8.20.     -  -  25.    Received  from  C.  C.  Miller,  in  full  of  account,  $147.18.     -  -  28. 

Paid  George  Cromwell  for  invoice  of  Jan.  13,  $412.11 31.    Cash  sales,  $114.16 

31.    Paid  rent  of  building,  $100;  clerk  hire,  $100;  postage,  $5;  sundry  expenses, 

$3.12. 

What  should  be  the  balance  of  cash  on  hand?  If  J  was  in  the  cash  drawer 
and  §  in  bank,  what  was  the  amount  in  bank? 

J^IERCHANDISE  ACCOUNTS. 

132.  Merchandise  is  a  general  name  given  to  any  commodity  that  is  bought 
for  the  purpose  of  selling  it  at  a  profit.     (^21c,  ^24) 

133.  As  the  principal  profit  of  a  mercantile  or  trading  business  is  derived 
from  the  buying  and  selling  of  merchandise,  those  accounts  in  which  are  recorded 
the  various  items  entering  into  the  cost  of  the  goods  purchased  and  the  various  items 
affecting  the  returns  from  the  goods  sold  are  of  first  importance,  as  they  provide  the 
data  from  which  the  gross  profd  from  sales  is  determined.  These  are  kno',^■n  as 
trading  accounts.  From  them  the  trading  statement  is  made  up.  (^233)  This 
statement  is  one  of  the  most  important  statements  made  in  connection  vrith  book- 
keeping or  accounting.  It  supplies. information  that  is  necessary  to  an  economical 
and  profitable  administration  of  a  business. 

133a.  NoTK :  A  comparison  of  the  results  shown  by  the  various  accounts  relating  to  the  buy- 
ing and  selling  of  merchandise,  from  year  to  year,  makes  possible  an  analysis  of  the  business, 
particularly  of  the  sources  of  profit  and  of  loss,  that  is  invaluable  in  building  it  up  and  strength- 
ening the  weak  spots,  cutting  off  an  expense  here,  increasing  a  profit  there.  This  is  a  necessity 
in  profitable  business  managemenL. 

PRINCIP.\L  AND  SUBSIDIARY  TRADING  ACCOUNTS 

134.  The  accounts  in  which  are  recorded  the  items  relating  to  the  purchase 
and  sale  of  goods  are  divided  into  two  classes — principal  accounts  and  subsidiary 
accounts. 


PURCHASES — PRINCIPAL   TRADING   ACCOUNT  43 

135.  The  principal  accounts  are  the  purchases  account,  the  sales  account  and 
the  inventory  account. 

136.  These  three  accounts  correspond  with  the  three  principal  operations 
incidental  to  conducting  a  mercantile  business,  namely:  purchasing  merchandise, 
selling  merchandise  (which  are  more  or  less  continuous  operations)  and  the  taking 
of  the  inventory  at  the  time  of  closing  the  books,  which  operation  occurs  at  the  close 
of  each  fiscal  period  for  which  the  business  is  conducted,  generally  once  a  year; 
therefore,  the  purchases  and  the  sales  accounts  are  continuing  accounts,  while  the 
inventory  account  receives  entries  only  at  the  closing  of  the  ledger  for  the  fiscal 
period. 

137.  There  are  a  number  of  different  items  such  as  freight,  express  and  drayaga 
charges,  allowances  and  rebates,  and  other  items,  varying  in  different  lines  of  busi- 
ness, which  relate  to  the  purcnases  and  sales  accounts,  and  contribute  to  increasing 
and  diminishing  both  the  cost  of  purchases  and  the  returns  (proceeds)  from  sales. 
Several  of  these  items  are  usuallv  entered  directly  into  the  purchases  and  sales, 
accounts  (11151,11152,  11153,11164,^165,  ^[166)  while  others  are  entered  in  special, 
or  subsidiary,  accounts  which  are  fully  explained  under  the  proper  heading. 
(11176) 

138.  The  subdivision  of  the  accounts  relating  to  the  purchase  and  sale  of  mer- 
chandise into  tne  principle  and  subsidiary  accounts  illustrates  an  important  princi- 
ple of  accountancy,  which  is  that  each  account  should  shoio  hut  one  specific  thing  or 
result;  and  it  follows,  therefore,  that  a  separate  account  should  be  opened  and  kept 
for  each  particular  item  of  information  which  it  is  desired  that  the  books  should 
show  or  that  should  appear  in  the  trading  statement . 

139.  This  method  has  an  important  educational  advantage  because  it  permits 
the  one  particular  purpose  of  an  account  to  be  fully  explained  so  that  it  may  be  clearly 
understood  by  the  student.  It  has  an  equally  important  practical  advantage  in 
supplying  the  data  to  make  intelligent  comparisons  between  the  results  shown  by 
the  various  accounts  for  different  fiscal  periods. 


PURCHASES  ACCOUNT— A  PRINCIPAL  TRADING  ACCOUNT 

140.  The  object  of  the  purchases  account  is  to  show  the  cost  of  purchases  for 
the  fiscal  period  covered  in  the  account.  "Purchases"  includes  only  thosegoods 
bought  to  be  sold.  The  debit  side  of  the  account  shows  the  cost  of  goods  pur- 
chased, (gross  purchases)  from  which  is  deducted  the  value  of  any  goods  returned, 
of  rebates,  allowances,  and  of  other  items  that  have  the  effect  of  decreasing  the  cost 
of  purchases,  these  items  appearing  on  the  credit  or  contra  side  of  the  account. 

141.  The  cost  of  purchases  in  wholesale  and  jobbing  businesses  includes  not 
only  the  invoice  price  of  the  goods,  but  also  the  cost  of  any  freight,  express,  drayage 
or  other  charges  on  the  goods,  of  commissions  for  buying,  and  of  all  other  expenses 


44 


BOOKKEEPING  AND   ACCOUNTANCY 


necessary  until  the  goods  are  ready  for  delivery  to  the  local  customer,  or  are  on  board  cars 
for  shipment.  In  retail  businesses,  department  stores,  etc.,  when  the  goods  are  ready 
for  sale  (i.  e.  are  placed  on  the  shelves  or  in  show  cases  in  stockroom)  the  costs  end  and 
the  selling  expenses  begin. 

Rule  for  Debiting  and  Crediting  Purchases  Accounts. 


142.     Debit  for  costs:  credit  for  returns. 

142a.     Debit  purchases    account  for   the 
costs  of  purchases  and  charges. 


1426.  Credit  purchases  account  for  goods 
returned  by  us,  and  rebates  and  allow- 
ances to  us  on  purchases. 


143.     The  various  applications  of  the  rule  are  as  follows: 


b. 


144.  Debit  purchases  account, — 
a.     For  all  merchandise  purchased. 

For*  incoming  freight,  express  and  dray- 
age,  (^184)  for  duties,  storage,  and  for 
other  similar  charges. 
For*  purchasing  agents'  commissions 
salaries  or  expenses  for  buying  goods. 
For  boxing,  packing  and  shipping  mate- 
rial (*warehouse  supplies)  (1[192)shipping 
clerks'  salaries,  warehousemen's  wages 
and  expenses  (*warehouse  labor),  and 
other  similar  supplies.  (1[198) 


*Unless   subsidiary   accounts   are   kept. 
(11152,  «1176) 


flf  considered  as  an  income  from  having 
eufficient  capital  to  discount  bills  (^2206). 


146.  Observe  that  in  every  instance  the 
purchases  account  is  debited  for  some- 
thing that  adds  to  or  increases  the  cost  of 
purchases:  or  whatever  increases  costs 
is  a  debit. 


145.  Credit  purchases  account, — • 

e.  For  all  goods  returned  by  us  after  having 
been  purchased,  and  debited  to  pur- 
chases account. 
/.  For  all  *rebates  and  allowances  on  pur- 
chases, such  as  shortage,  damage  or 
overcharge  claims  allowed  on  goods  pur- 
chased when  the  full  amount  has  been 
debited  to  purchases  account,  (^206) 
or  for  *any  rebates  or  returns  on  freight, 
express  or  other  charges  paid. 

g.  For  goods  taken  from  stock  for  private 
use  or  donation,  ai  cost  price. 

h.  For  goods  taken  from  stock  to  be  ship- 
ped for  sale  on  commission,  or  transfer- 
red to  a  branch  store,  when  billed  at  cost 
price. 

X.  For  any  returns  from  material  or  labor 
debited  to  this  account. 

j.  For  t^.ash  discounts  allowed  to  us  on 
purchases,  vthen* purchase  discounts  are 
considered  as  decreasing  the  cost  of  pur- 
chases. 

147.  Observe  that  in  every  instance  the 
purchases  account  is  credited  for  some- 
thing that  decreases  or  lowers  the  cost  of 
purchases:  or  whatever  decreases  costs 
is  a  credit. 


148.     Transactions    Illustrating  the  Various  Applications  of  the  Rule 
(H  142)  FOR  Debiting  and  Crediting  Purchases  Account 

F.  A.  Raymond's  transactions  affecting  the  purchases  account  are  as  follows: 
Jan. 5.   He  paid  freight  charges,  $10.15.    (!|1446) Jan.9.    Hepaidacom- 


CLOSING   PURCHASES    ACCOUNT 


45 


mission  of  1%  and  other  expenses,  amounting  to  $5.50,  for  goods  purchased  in  New 

York  through  an  agent.    (^144c) Jan.  12.    He  was  allowed  a  shortage  claim, 

S2.20.    (^145/) Jan.  14.    He  was  allow^ed  a  rebate  for  an  overcharge  on  freight 

paid,  $1.60    (11145/) Jan.  16.    He  was  allowed  a  credit  for  an  overcharge  on 

goods  purchased,  $18.40.  (11145/) Jan.  18.  He  received  an  allowance  for  dam- 
aged goods  purchased,  $5.20.    (If  145/)    --  -  Jan.  25.    He  returned  goods  which  were 

foundto  be  unsalable,  amounting  to  $40.18.    (1|145e) Jan. 28.    He  paid  freight, 

express  and  draj^age  bills,  amounting  to  $27.85.  (1[1446,  I1I8O.)  -  -  Jan. 
31.  His  purchase  discounts  for  the  month  were  shown  to  be  $173.51.  (1[145/)  He 
paid  salaries  and  wages  for  warehouse  labor  for  the  month,  $120.  (1[144d)  He  paid 
for  boxes,  packing  and  shipping  material  and  other  warehouse  supphes  for  the  month, 
$61.35.  His  total  purchases  for  the  month,  as  shown  by  the  purchase  book,  were 
$3180.53  (1[144a) 

What  is  the  net  cost  of  the  merchandise  purchased? 


EXERCISE. 

148a.  Prepare  a  ledger  account  for  the  preceding  transactions,  as  follows: 

(1)  Read  and  study  each  transaction  carefully,  referring  to  the  special  applica- 
tion of  the  rule  for  debiting  and  crediting  purchases  account  indicated  by  the  para- 
graph numbers.    (1I145gf,  1[145/iand  11145?;,  will  be  illustrated  in  subsequent  exercises.) 

(2)  Apply  the  rule  (1[142)  and  make  the  proper  debit  and  credit  entries  in  the 
purchases  account,  indicating  in  the  explanation  column  the  nature  of  each  item, 
as  shown  in  the  illustration.    When  completed,  submit  for  approval. 

Illustration  22. 


>^2oiyt^>A^ei.^L-£.^i^ 


/r 


1486.  The  illustration  shows  the  account  as  it  appears  January  31,  with  the  fig- 
ures in  the  posting  columns  omitted.  The  small  pencil  figures  show  the  footings, 
and  also  the  balance  of  the  account.  This  illustration  shows  the  account  as  it  ap- 
pears when  all  the  various  charges  and  allowances  affecting  purchases  are  entered 
in  one  account,  consequently,  the  balance  shows  the  net  cost  of  merchandise  purchased. 
(If  149a)  The  account  is  not  ruled  nor  footed  until  after  the  closing  journal  entry  is 
posted,  when  the  account  would  appear,  after  it  is  closed,  as  shown  in  illustration  23. 


46 


BOOKKEEPING   AND    ACCOUNTANCY 


Illustration  23. 


^^'iz^uAm-t^U.-iic^-^fi/ci^ 


\s/ 


^ityf<'^t,a-<te^  ^ 


^/    ^S     ZJ- ^^^o-rrr^ ^A^ti^, 


J^O^  3/ 


t 


■yr^cLckc:^. 


's^i.ec^ion^'%'X^oC'f^^^ 


J10_ 


/7S  W/ 

—r^V-r — ?-7" 


i:^/  (,¥  s/ 


\juo6r  ^s^ 


148f.  The  illustration  following  shows  the  purchases  account  as  it  appears  when 
subf^idiary  accounts  are  kept  with  warehouse  supplies  (^192),  warehouse  labor  (^198), 
and  purchase  discounts  (1J220),  in  which  case  the  difference  between  the  two  sides  of 
the  account,  .$3156.47,  shows  the  ^rsi  or  prirne  cost.     (^1496) 


Illustration  24. 


r>t^eyt'C-^t-tzA.4i<^ 


vjT 


p^i^g-t^gX^ 


<^Zz.g^,t.7^  <nrfrT-/  ^:£k^ 


/&  \/s- 


Jmm^,   f2   '<^-'A^^,Z<7^^^ 


T 


/V  K^yi^^yJ.,:^^^ 


2^Z^ 


A 


U?- 


Xi^  c-75>g-g-«xg<4-^-^.z^ 


Z7  rjr\ 

^'  Ti 


/  &>     07*^yL^.^A.-<;7yL-M^ 


/f  \^0 


J/ 


yj?^fc^-e^<ga<ac/  J/ si .  V7 


j/g'a  S3 


/  B   L;^Xg^>>t<y^<z^^«>^'TgV 


\2S . 


^Z/L 


/-4=^^_ 


-m\k- 


'^t^lt.e^jK^  yeylliiT  aZyU' 


\3/s-^  y/7_ 


32Z'¥  03 


\32.2¥  03 


\\%d.  Notice  that  the  balance  shown  by  this  account  differs  from  the  balance 
shown  by  the  preceding  account.  This  is  caused  by  the  elimination  of  the  three 
items  of  warehouse  labor,  warehouse  supplies,  and  purchase  discounts,  which  are 
shown  in  separate  accounts  and  will  appear  as  separate  items  in  the  trial  balance. 
The  l)alance  of  this  account  is  the  cne  shown  in  the  trial  balance.     (•[483). 


To  Close  Purchases  Account. 

149.  The  difference  between  the  two  sides  of  the  purchases  account  always 
shows  a  debit  balance,  which  should  be  included  in  the  trading  statement  for  the 
period.  (1[242).  (a)  If  all  the  various  charges  and  allowances  affecting  purchases  are 
entered  directly  into  the  purchases  account,  the  balance  shows  the  net  cost  of  mer- 
chandise  purchased.  (^1486)  (b)  If  subsidiary  accounts  are  kept  for  accounts  named 
in  ^144dand  11145;,  the  balance  shows  the^rsf  or  prime  cost  of  the  goods  purchased, 
(c)  If  subsidiary  accounts  are  kept  with  all  the  various  charges  and  allowances 
affecting  purchases  excepting  items  named  in  ^144a  and  1I145e,  the  balance  shows 
the  net  invoice   cost   of  the  goods  purchased  for  the  period. 

150.  To  close.  After  the  trading  statement  has  been  prepared,  the  pur- 
chases account  is  closed  by  a  journal  entry  made  up  from  the  items  appearing  in 
the  trial  balance  which  affect  the  trading  statement.  When  the  closing  item  to 
the  purchases  account  has  been  posted,  which  should  balance  the  account,  rule 
the  closing  lines  in  red  ink,  as  shown  in  illustration  23,  and  enter  the  footings  in 
black  ink. 


EXERCISES    IN    PURCHASES    ACCOUNTS  47 

151.  It  is  the  best  practice  to  enter  the  items  coming  under  ^144a  and  1[1446, 
i.e.,  for  goods  purchasecl  per  invoices  and  for  transportation  and  other  charges 
thereon,  directlj^  into  the  purchases  account.  It  is  also  the  best  practice  to  enter 
the  items  coming  under  If  145c,  11145^,  ^145/z  and  If  145z,  i.e.,  those  items  for  goods  re- 
turned, for  goods  taken  from  stock,  and  for  rebates  on  transportation  charges,  direct 
in  the  purchases  account.  This  practice  is  preferred  for  the  reason  that  in  pre- 
paring the  trading  statement  these  items  can  easily  be  separated  one  from  the  other 
in  the  ledger  account,  particularly  if  each  item  is  designated  in  the  explanation  col- 
umn as  entered.  All  the  items  included  in  ^144a  to  1fl45i  may  be  entered  directly 
into  the  purchases  account,  particularly  if  the  business  is  small. 

152.  Separate  accounts  for  the  items  named  in  ^1446,  1fl44c,  1fl44c^,  11145/, 
^145^'  and  If  145/,  and  other  similar  items  relating  to  the  purchases  account  may  be 
kept  when  it  is  desired  that  they  should  appear  separately  in  the  trading  statement 
and  are  so  numerous  as  to  make  the  method  suggested  in  1fl53  impracticable. 
All  such  accounts  are  known  as  subsidiary  purchase  accounts. 

153.  When  it  is  desired  to  show  separately  in  the  trading  statement  any  one  or 
more  of  the  items  included  in  ^144a  to  ^145j,  inclusive,  whether  entered  in  the 
principal  purchase  account  or  in  subsidiary  accounts,  they  may  be  separated  on  an 
analysis  sheet  to  whatever  extent  is  desired,  at  the  time  of  preparing  the  trading 
statement.  The  analysis  sheet  is  described  in  If 490.  The  analysis  sheet  is  preferred 
by  many  accountants  because  by  its  use  the  number  of  accounts  in  the  ledger  may 
be  greatly  reduced,  the  trial  balance  shortened,  and  the  opportunities  for  errors 
lessened. 

Exercises  in  Purchase  Accounts. 

154.  Prepare  ledger  accounts,  like  the  illustration  22,  for  the  following  exam- 
ples, applying  the  rule  (If  142)  for  each  transaction,  following  carefully  the  special 
instructions  for  each  example.  Indicate  briefly  in  the  explanation  column  the 
nature  of  each  item. 

(1)  Jan.  4.  Paid  freight  and  drayage  on  purchases,  $157.13  (^1446) ;  storage 
charged  by  railroad,  $2.00.  —  Jan.  6.  Received  credit  memorandum  for  defec- 
tive goods  returned,  $46. 17.  (If  145/)  — Jan.  8.  Received  credit  memorandum  for 
shortage  in  goods  purchased, $12. 20.  — Jan.  18.  Merchandise  was  taken  from  stock 
for  the  private  use  of  the  proprietor,  at  cost,  $6.70.  -  -  Jan.  21.  He  donated 
goods  to  the  Salvation  Army,  at  cost  price,  amounting  to  $10.  —  Jan.  31.  The 
Merchants'  Transfer  Co.'s  bills  for  drayage  for  the  month  amount  to  $17.50.  Ship- 
ping boxes  were  purchased  to  the  amount  of  $42;  nails,  $1.00;  salaries  of  warehouse- 
men and  packers,  $80;  purchase  discounts,  $116.40.  The  total  purchases  for  the 
month  shown  by  the  purchase  book,  were  $2316.19. 

What  is  the  net  cost  of  the  merchandise  purchased  for  the  month?  (^149a) 
Show  the  account  as  it  would  appear  Jan.  31,  with  the  columns  footed  and  the  bal- 
ance shown  in  pencil.  When  approved,  enter  the  difference  on  the  smaller  side  un- 
der date  of  Jan.  31,  writing  "Trading  %  to  close"  in  the  explanation  column,  as 
shown  in  illustration  23,  then  rule  and  foot  the  account  and  present  it  for  approval. 


48  BOOKKEEPING   AND   ACCOUNTANCY 

(2)  The  folio  wing  items  are  shown  in  the  purchases  account  under  date  of  April 
30: 

Purchases  for  the  month,  $16,936.17;  freight  and  drayage  inward,  $116.24; 
purchasing  agent's  salary,  one  month,  $125;  traveling  expenses  to  Boston,  New 
York  and  Philadelphia,  buying  goods,  $145.87;  boxes  and  crates  purchased  for  the 
month,  $36.14;  shipping  clerks'  salaries  and  warehousemen's  wages,  $120;  credits 
received  for  goods  returned,  $45.16;  rebates  and  allowances,  $27.18;  merchandise 
transferred  to  branch  store,  at  cost,  $269.14;  received  check  from  railroad  company 
for  $27.16  for  overcharges  on  freight  during  the  month;  purchase  discounts,  $276.19. 

Prepare  the  account  showing  the  net  cost  of  merchandise  purchased,  with  the 
account  closed,  ruled  and  footed  as  previously  instructed.  What  is  the  net  invoice 
cost  of  the  goods  purchased  (^|149c)?  the  first  or  prime  cost  (^1496)?  Remember 
that  in  keeping  a  set  of  books  the  closing  entry,  "April  30  Trading  %  to  close," 
would  not  be  made  until  posted  from  the  journal.    (1[150) 

155.  The  results  shown  by  accounts  supplythe  material  of  so  many  arithmetical 
problems,  each  one  of  which  is  solved  by  ordinary  arithmetical  processes.  The 
facts  or  results  shown  by  any  account  may  be  stated  in  the  form  of  an  ordinary  pro- 
blem in  arithmetic,  as  shown  in  the  following  examples  and  illustration.  One  of 
the  principal  functions  of  accounting  is  putting  arithmetical  results  into  the  form 
of  statements  so  that  these  results  may  be  shown  in  their  proper  relations. 


Arithmetical  Problems — Purchases  Account. 


(1)  During  the  month  of  May  the  purchases 
were  $7019.76;  freight  inward,  $217.86;  storage 
and  drayage,  $56.17;  lumber  for  boxes,  $26.10; 
nails,  $4.00;  paper  and  twine,  $2.60;  shipping 
clerks'  salaries,  $96;  warehousemen's  wages,$18;  y 

purchasing    agent's  salary,   $125;  traveling  ex-  -^^^^^kz2^ 

penses,  $28.60;  credit  memorandum  received  for  -g^^-^       4l^^f^fkxi^ 

goods   returned,    $16.40;   allowances   for   over-  ■^l'^;/!  ^/la^ 

charges  on  bills,  $21.36;  received  for  claim  al-  ^^'',1  z/'r^ 

lowed  bj' railroad  for  goods  damaged  in  transit,  ^y!' ^  -^o'/ 

$8.60;   merchandise   sold  to  employes  at  cost,  ^-"^ "  'jf,^^'^% 

$28.90;  donation  of  goods  to  Orphans'   Home,  ^/'  t^z.f,2,o 

$30;  goods  shipped  to  Babbitt  &  Co.  on    com-  '  ^^ ;^  „ 

mission,  at  cost,  $105.30;  purchase   discounts,  ^  /  ^//>  f  ^i4^c^<^^. 

«^-'-'-64.  7  7C4-S<f  >Z^c.*^a/r 

What  was  the  net  cost  of  the  merchandise 
purchased  for  the  month? 


Illustbation  25. 


SALES — A    PRINCIPAL   TRADING   ACCOUNT  A9 

(2)  Purchases  for  the  month,  $11613.20;  freight,  express  and  drayage  charges, 
3271.12;  credit  received  for  overcharge  on  freight  bill,  $13.97;  duties  on  goods  im- 
ported, $114.36;  boxing,  packing  and  shipping  materials,  $68.97;  credit  received  for 
allowance  caused  by  defective  packing,  $12.90;  goods  returned,  $41.50;  goods 
shipped  for  sale  on  commission,  at  cost,  $3 12. 17;  cash  discounts  allowed  on  purchases, 
$293.43. 

What  is  the  net  cost  of  the  goods  purchased  for  the  month? 

(3)  Total  purchases  for  the  year  ending  December  31,  $87963.43;  total  cost 
of  freight,  express,  drayage,  duties,  storage,  and  other  charges  for  the  year, 
$5537.36;  goods  taken  from  stock  for  private  use,  at  cost  pnce,  $91.20;  goods 
shipped  for  sale  on  commision,  at  cost  price,  $962.50;  rebates  on  transportation 
charges,  $31.12 

What  is  the  first,  or  prime,  cost  of  the  purchases  for  the  year?  (111496)  What 
item  in  the  above  problem  represents  the  net  invoice  cost  of  the  goods  purchased 
for  the  year?     (11149a) 

(4)  Purchases  for  month,  per  purchase  book,  $3167.19;  incoming  freight  and 
drayage,  $76. 18;  duties  and  storage,  $56. 12;  commission  for  buying,  $100;  purchasing 
agent's  expenses,  $9.60; allowances  and  shortages,  $34.20;  shipments  to  Day  &  Co. 
at  cost,  $180 ;  transferred  goods  to  Richstreetbranchstore  at  cost,  $236.17 ;  the  Trans- 
fer &  Storage  Company  allows  us  a  credit  of  $6.45  for  overcharges  and  errors  in  their 
bills  of  this  month;  purchase  discounts  during  the  month,  $196.14 ;salaries  of  boxers 
and  packers,  $95;  lumber,  $20;  twine,  $1.50;  wrapping  paper,  $12;  nails,  $1.50;  strap 
iron,  $3;  excelsior,  $2.75. 

What  is  the  net  invoice  cost,  prime  cost,  and  net  cost  of  purchases  for  the 
month?  (11149) 


SALES  ACCOUNT— A  PRINCIPAL  TRADING  ACCOUNT. 

156.  The  object  of  the  sales  account  is  to  show  the  returns  from  sales  (proceeds) 
for  the  period  covered  by  the  account.  The  credit  side  of  the  account  shows  the 
gross  sales,  from  which  is  deducted  the  value  of  any  goods  returned,  of  allowances, 
rebates,  overcharges,  and  of  any  other  items  that  have  the  effect  of  redwcwgZ/ie  returns 
from  sales,  these  items  appearing  on  the  debit  or  contra  side  of  the  account. 


60  bookkeeping  and  accountancy 

Rule  for  Debiting  and  Crediting  Sales  Account. 

157.  Debit  for  costs:  credit  for  returns. 

157a.  Debit  sales  account  for  goods  returned  1576.     Credit   sales  account  for   the  gross 

to  us,  and  for  rebates  and    allowances  sales  of  merchandise, 

to  others  on  sales. 

158.  The  various  applications  of  the  rule  are  as  follows: 

159.       Debit  sales  account, —  160.  Credit  sales  accounts, — 

a.  For  all  goods  returned  to  us  after  having  d.     For  all  merchandise  sold. 

been  sold  and  credited  to  sales  account.  e.      For  goods  taken  from  stock  to  be  ship- 

b.  For  all  *rebates  and  allowances  on  sales,  ped  for  sale  on  commission,  when  billed 
such  as  shortage,  damage,  or  overcharge                 at  selling  price. 

claims  allowed  on  goods  sold  when  the 

full  amount  has  been  credited  to  the  sales  *Unless    subsidiary  accounts    are    kept. 

account.     (1[210)  (11176) 

c.  Fort  cash  discounts  allowed  to  others  on  flf  considered  an  expense  from  not  hav- 
sales   when    *sales    discounts    are   con-  ing  sufficient  capital.     (^2266) 

sidered  to  be  a  reduction  in  return  from 
sales.     (11266) 

161.     Observe   that  in   every  instance  the  162.  Observe  that  in   every   instance   the 

sales   account  is  debited  for  something  sales   account  is  credited  for  something 

that  diminishes  or  decreases  the  returns  that  adds  to  or  increases  the  returns  from 

from  sales:   or  whatever   decreases   re-  sales :  or  whatever  increases  returns  is  a 

turns  is  a  debit.  credit. 

163.  Transactions   Illustrating   the    Various  Applications  of  the  Rule 
(11157)  FOR  Debiting  and  Crediting  Sales  Account 

F.  A.  Raymond's  transactions  affecting  the  sales  account  are  as  follows: 

Jan.  19.    He  allowed  an  overcharge  claim  of  $7.56.    (^1596)     -    -    Jan.  21. 

He  allowed  for  goods  damaged  by  careless  packing,  $12.40.    (1[1596) Jan.  25. 

He  allowed  a  shortage  claim  of  $15.18  lor  goods  which  were  omitted  from  the  ship- 
ment by  a  mistake.     ("[1596) Jan.  31.    The  total  amount  of  goods  returned 

for  credit  during  the  month  was  $64.13.    (•[159a) The  sales  discounts  for  the 

month  were  shown  to  be  $171.64.     (1[159c) His  total  sales  for  the  month,  as 

shown  by  the  sales  book,  were  $7124.38.    (1[160d) 

What  were  the  net  returns  from  the  merchandise  sold?     (1164) 


exercise. 

i63a.  Prepare  a  ledger  account  for  the  preceding  transactions,  as  follows: 

(1)  Study  each  transaction  carefully,  looking  up  the  references  indicated  by 
the  paragraph  numbers. 


CLOSING    SALES   ACCOUNT 


51 


(2)  Apply  the  rule  (1[157)  and  make  the  proper  debit  and  credit  entries  in  the 
sales  account,  indicating  in  the  explanation  column  the  nature  of  each  item,  as  shown 
in  the  illustration.  Then  foot  the  account,  enter  the  difference  on  the  lesser  side 
with  the  explanation,  "Trading  %  to  close,"  rule  the  account,  and  bring  down  foot- 
ings.   When  completed,  present  for  approval. 


Illustration  26. 


^^iz/^Ay 


163&.  The  illustration  shows  the  accomit  when  all  the  various  charges  affecting 
sales  are  entered  in  one  account,  including  sales  discounts  (11226)  which  are  usu- 
ally entered  in  a  separate  account.  The  illustration  below  shows  the  account  with 
this  item  omitted,  which  appears  in  a  subsidiary  account  considered  as  a  trading 
account  (1[226a).  The  first  illustration  shows  the  account  as  it  appears  when  the 
trial  balance  is  taken,  the  balance  in  pencil  figures  being  shown  in  the  trial  balance 
(^483).  The  second  illustration  shows  the  account  after  the  closing  entry  has  been 
posted  and  the  account  has  been  ruled  and  footed. 


Illustraiioa  'i1. 


^(pfA' 


'-2^^ 


^^\ 


/g*    Ch^/i^.,A^eZy!t^ 


t<s.^ 


2S "  ■  J'./j<fH.7ji(.rr^y 


J^i^^^r-r/yl      A  7^^ 


-7- 


^ 


/  ?\  ^C\ 


/.■5;  / 


C4  /3 


-Jv^i 


Zsza: 


AL 


y/Z' 


s^ 


3  I ,     tC^.^.^.->y  o^ryTJ,  rA^l^ 


^02:? 


^ 


M 


yy>^   ^'^ 


To  Close  Sales  Account. 


164.  The  difference  between  the  two  sides  of  the  sales  account  always  shows  a 
credit  balance,  which  should  be  included  in  the  trading  statement  for  the  period 


52  BOOKKEEPING   AND   ACCOUNTANCY 

(^242).  (a)  K  all  the  various  charges  and  allowances  affecting  sales  are  entered  di- 
rectly into  the  sales  account,  the  balance  shows  the  net  returm  from  merchandise  sold 
for  the  period,  (6)  If  subsidiary  accounts  are  kept  with  all  the  various  charges  and 
allowances  affecting  sales  excepting  items  named  in  ^159a  and  ^160c?,  the 
balance  shows  the  net  sales  for  the  period. 

165.  To  close.  After  the  trading  statement  has  been  prepared,  the  sales  ac- 
count is  closed  by  a  journal  entry  made  up  from  the  trading  statement.  When  the 
closing  item  to  the  sales  account  has  been  posted,  which  should  balance  the  account, 
rule  the  closing  lines  in  red  ink,  as  shown  in  illustrations  26*  and  27,  and  enter  the 
footings  in  black  ink. 

166.  It  is  the  best  practice  to  enter  the  items  coming  under  ^160c?,  ^160e, 
and  Tfl59a,  being  the  items  of  goods  sold  and  of  goods  returned,  directly  into 
the  sales  account,  as  these  items,  if  they  are  required  to  appear  as  separate  items  in 
the  trading  statement,  can  easily  be  classified  on  an  analysis  sheet,  particularly  if 
each  item  is  designated  in  the  explanation  column  as  entered. 

167.  Separate  accounts  ioT  the  items  named  in  ^1596,  l[159c,  and  other  similar 
items  relating  to  the  sales  account  (excepting  those  named  in  ^166)  may  be  kept 
when  it  is  desired  that  they  should  appear  separately  in  the  trading  statement. 
When  kept,  these  are  known  as  subsidiary  sales  accounts. 


Exercises  in  Sales  Accounts 

168.  Prepare  ledger  accounts  like  illustration  26  for  the  following  exam- 
ples, applying  the  rule  (11157)  for  each  transaction,  indicating  briefly  in  the  expla- 
nation column  the  nature  of  each  item.  Include  the  entry  "Trading  %  to  close" 
which  would  be  made  from  the  closing  journal  entry  in  keeping  a  set  of  books. 

(1)  June  7.    Goods  were  returned,  $78.25. June  11.    Rebate  was  made 

for  overcharge,  $62.56. June  30.    Total  sales  were  $8619.71;  cash  discounts 

during  the  month  $208.16. 

What  are  the  net  returns  from  merchandise  sold? 

(2)  July  10.    Goodswere  shipped  on  consignment  at  selling  price,  $367.19. 

July  21.    Goods  were  returned,  $116.42,  and  an  allowance  of  $10  for  an  overcharge 

was  made. July  27.  Claim  for  damaged  goods  was  allowed,  $7.21.     Sales 

discounts,  $316.43;  total  sales,  $9716.73. 

What  were  the  net  returns  from  sales? 


Arithmetical  Problems — Sales  Accounts. 
Find  the  results  for  the  following  problems  (1[155) : 


INVENTOIiT   ACCOUNTS 


53 


Illubtbahon  28. 


(1)  During  the  month  of  August  the  sales  on  ^oA^jt^^m/ 
account  were  $2917.60;  sales  for  cash,  $216.45;  goods  -— — — 
shipped   on  consignment    at  selling  price,  $176.80;  -^^^^^^^^g^      ^^,ycc 
goods  returned,  $75.40;  allowances  for  overcharges,  V7>c         ^'  ^>^' 
$17.40;  allowance  for  goods  damaged  on  account  of            j^/i!vo      yJ'/oA'T^. 
defective  boxing,  $8.00;  sales  discounts,  $213.40.                  i:'^'f  t-  • — -^^^<^^_^ 

(2)  Sales  on  account  for  the  month,  $7916.70;  cash  sales,  $219.67;  sales  account 
credited  for  undercharges  on  goods  previously  billed,  $20;  goods  shipped  on  consign- 
ment atseUing  price,  $276.18.  Of  this  shipment,  goods  were  returned  amounting 
to  $176,  there  being  no  market  for  them  at  the  point  to  which  they  were  shipped. 
Goods  returned,  $27.16;  various  allowances  and  rebates,  $38.40;  sales  discounts, 
$3.16.    What  are  the  net  returns  from  sales? 

(3)  Total  sales,  $4713.75;  goods  returned,  $96.18.  With  separate  accounts  kept 
for  items  included  in  ^1596  and  *I159c,  what  are  the  net  sales  for  the  month? 
(^1646)  If  there  were  rebates  and  allowances  amounting  to  $84.12,  and  cash  dis- 
counts amounting  to  $53,  what  were  the  net  returns  from  sales?    (^164) 

INVENTORY  ACCOUNTS. 

169.  A  merchandise  inventory  is  a  list  of  merchandise  in  stock  or  on  hand  at 
the  end  of  any  fiscal  period  taken  at  cost  price,  or  if  market  price  is  less  than  cost,  then 
at  market  price.  The  cost  price  of  each  article  in  an  inventory  is  the  invoice  price  plus  a 
proportionate  share  of  freight,  express,  and  other  charges  and  expenses  necessary  in 
placing  the  article  in  stock.  These  incidental  charges  should  be  and  usually  are 
figured  in  the  marked  cost  price  placed  upon  the  article  when  it  is  received.  They 
correspond  with  the  debit  items  charged  to  the  purchases  and  subsidiary  accounts 
exclusive  of  the  invoices.  It  is  upon  the  marked  cost  price  that  the  percentage  of 
profit  is  added  in  fixing  the  selling  price.  When  certain  fixed  discounts,  such  as 
trade  discounts,  are  to  be  allowed,  which  are  to  be  excluded  from  the  percentage 
of  profit,  they  are  added  to  the  selling  price,  in  which  case  the  price  placed  upon 
the  goods  is  the  marked  selling  price. 

169a.  Shop-worn  goods,  goods  out  of  style  or  out  of  date,  should  be  inventoried 
at  cost,  and  the  amount  of  the  depreciation  between  the  cost  value  and  the  estimated 
value  should  be  listed  separately.  The  total  amount  of  the  depreciation  should  be 
charged  in  the  profit  and  loss  statement  as  a  separate  item,  otherwise  the  trading 
profit  shown  by  the  trading  statement  would  be  affected,  which  would  thus  disturb 
the  average  per  cent  of  gross  profit  when  the  trading  profit  of  one  period  is  compared 
with  that  of  another. 

170.  It  should  be  remembered  that  a  merchandise  inventory  should  include  only 
the  value  of  goods  on  hand  which  were  purchased  to  be  sold  at  a  profit,  and  that  the 
inventory  should  not  include  the  value  of  furniture  and  fixtures,  office  appliances, 
machinery,  warehouse  implements,  boxing  and  packing  materials,  or  any  other 


54 


BOOKKEEPING   AND    ACCOUNTANCY 


property  whatsoever  except  that  included  in  the  designation,  "purchased  to  be  sold 
at  a  profit." 

171.  The  object  of  the  merchandise  inventory  account  is  to  show  the  value  of 
the  merchandise  on  hand  at  the  end  of  any  fiscal  period.  The  inventory  account 
shows  a  resource,  which  should  be  included  in  the  statement  of  resources  and  liabilities 
for  the  period,  and  is,  therefore,  known  as  a  resource  or  asset  account. 

Rule  for  Debiting  and  Crediting  Inventory  Accounts. 

172.  Debit  for  the  value  of  the  inventory  on  hand  at  the  end  of  any  fiscal  -period : 
credit  for  the  inventory  on  hand  at  the  close  of  the  last  -preceding  fiscal  period. 


I72a.  Note  that  the  inventory  account  is 
debited  for  the  value  of  the  inventory- 
on  hand  at  the  end  of  any  fiscal  period. 


172b.  Note  that  the  inventory  account  is 
credited  at  the  close  of  the  next  fiscal 
period  for  the  inventory  for  which  it  was 
debited  a<  the  the  close  of  the  last  preced- 
ing fiscal  period. 


172c.   Other  inventories  are  described  in  1(465. 

173.    Transactions  Illustrating  the  Merchandise  Inventory  Account. 

The  followng  are  monthly  inventories  covering  a  period  of  three  months 
prior  to  January  31.  Prepare  a  ledger  account  showing  them  properly  debited  and 
credited : 

October  31,  $6842.19;  November  30,  $8716.42;  December  31,  $7516.45; 


Illustration  29. 


^:ry\?2^y^T:^-9-T.^>f7^^ 


7^1     r 


(xf^A  "A  ^i-^"- 


IJl 


^irV7.,  (f 


T^y^A^    J^ 


Jhfy,  3/ 


1^//L   ^?i     r/^A    ^f 


ys5-/(f 


Ldi 


!ty/(^.^? 


173a.  Notice  that  the  account  is  debited  for  the  inventory  of  October  31  on  that 
date,  and  that  the  account  is  credited  for  the  same  inventory  on  November  30,  one 
month  later  when  the  next  inventory  is  taken,  at  which  time  the  balancing  items  are 
ruled  out  as  showTi;  and  that,  therefore,  the  account  will  always  show  the  value  of 
the  merchandise  on  hand  ai  the  close  of  the  last  precedirig  fiscal  period. 

174.  The  inventory  of  the  last  preceduig  fiscal  period,  added  to  the  cost  of  the 
purchases  for  the  present  fiscal  period,  less  the  inventory  for  the  present  fiscal 
period,  gives  the  cost  of  the  merchandise  sold.    (See  trading  statement,  1[242). 


INVENTORY   ACCOUNTS 


56 


LLU8TRATION  30. 


INVEITTOEY  DECEMBER  31,    19 


2488  bu.  Wheat  .97  2413.36 

5674     "  Oats  .51  2893.74 

765     "  Rye  .83  634.95 

2624     "  Com  .60  1574.40 


7516.45 


Exercises  in  Inventory  Accounts. 


175.  Prepare  accounts  for  the  following  transactions: 

(1)  At  the  closing  of  the  books,  December  31,  the  inventory  of  goods  on  hand 

was  $11360.50. At  the  next  semi-annual  closing,  June  30,  the  inventory  was 

$12448.37.     -  -    Atthenextsemi-annualclosing,  December  31,  the  inventory  was 
$10991.71.    What  does  the  account  show  at  that  date? 

(2)  In  a  business  where  quarterly  inventories  were  taken,  the  inventory  on 
March31wasS23741.49,onJune30,  $64927,26,  on  September  30,  $64417.71,  and 
Qti  December  31,  $45516.85. 

Show  the  account  as  it  would  appear  December  31. 

Arithmetical  Problems — Inventory  Accounts. 


Illustration  31. 


(1)  The  inventory  at  the  close  of  the  last  preced- 
ing fiscal  period  was  $2396.45. The  net  cost  of 

merchandise  purchased  for  the  present  fiscal  period  <^:^£:^££2?:^ 

is  $14365.27. The  inventorv  at  the  close  of  the  x^^^^y^i-C^^i^J^^T,-.^ 

present  fiscal  period  is  $2875.90  ^^ff^ff^t^^^ 

What  is  the  cost  of  the  merchandise  sold  during  /■»  ^i-ri  i^6x^^^^nc^t^- 

the  present  fiscal  period?     (1[174) 

(2)  The  last  preceding  inventory  was  $96784.00. The  total  purchases  for 

the  fiscal  period  are  $263712.37.     -  -  The  present  inventory  is  $87979.12. 

What  is  the  cost  of  the  merchandise  sold  during  the  period? 

(3)  The  last  preceding  inventory  was  $61320. There  were  no  purchases 

since. The  present  inventory  is  $9721.12 

What  is  the  cost  of  the  merchandise  sold? 

(4)  The  business  was  started  at  the  beginning  of  the  present  fiscal  period  with 
no  inventory  on  hand. Tne  total  purchases  to  date  are  $35712. The  pres- 
ent inventory  is  $7420. 

What  is  the  cost  of  the  merchandise  sold? 


66  BOOKKEEPINQ  AND  ACCOUNTANCT 


SUBSIDIARY  TRADING  ACCOUNTS. 


176.  The  subsidiary  accounts  include  all  accounts,  other  than  the  principal 
trading  accounts,  which  contribute  towards  increasing  or  diminishing  the  gross 
trading  profit.  They  are  kept  for  the  purpose  of  classifying,  under  separate  heads, 
the  various  items  affecting  the  purchases  and  sales  accounts  which  would  otherwise 
be  entered  directly  into  those  accounts,  so  that  they  may  be  shown  separately,  if 
desired,  in  the  trading  statement. 

177.  Subsidiary  accounts  vary  considerably  in  different  Unes  of  business,  de- 
pending upon  the  nature  and  extent  of  the  business,  the  amount  of  detailed  informa- 
tion desired,  and,  to  some  extent,  upon  the  frequency  with  which  similar  items  occur. 

178.  The  usual  disposition  of  subsidiary  items  is  indicated  in  paragraphs  151, 
152,  153,  166  and  167,  although  this  arrangement  may  not  be  the  best  in  all  cases. 
In  preparing  a  system  of  accounts  for  any  line  of  business,  the  exact  information 
required  must  first  be  determined  and  then  the  accounts  must  be  so  arranged  as  to 
provide  that  information.  In  the  sets  accompanying  this  text  various  arrangements 
of  subsidiary  items  and  accounts  are  illustrated,  each  being  the  one  best  adapted 
to  give  the  information  desired  for  the  particular  line  of  business  illustrated. 

179.  All  subsidiary  items  may  be  entered  directly  into  the  purchases  and  sales 
accounts,  in  which  case  it  is  necessary  to  separate  them  into  classes  or  groups,  under 
appropriate  headings,  on  separate  sheets  or  statements,  before  a  detailed  trading 
statement  can  be  prepared.  These  areknown  as  analysis  sheets  or  "exhibits"  (11490) 
and  they  are  attached  to  and  accompany  the  trading  statement.  This  method  is 
particularly  well  suited  to  departmental  accounts. 

FREIGHT. 

180.  Freight  and  express  charges  are  the  amounts  paid  for  the  transportation  of 
goods  by  public  carriers.  Drayage  and  cartage  charges  represent  the  cost  of  hauling 
goods  bet^ween  the  warehouse  and  shipping  points.  As  understood  by  accountants, 
the  term  "freight"  includes  all  freight,  express,  drayage,  cartage,  and  other  charges 
relating  to  the  transportation  of  goods. 

181.  The  terms  on  which  goods  are  bought  and  sold,  generally  indicate  which  of 
the  parties  is  to  pay  transportation  charges.  Goodsshipped"f.  o.  b."  (free  on  board) 
means  that  the  seller  delivers  the  goods  on  board  the  cars,  boat  or  ship,  after  which 
they  are  transported  at  the  expense  of  the  buyer.  "Charges  prepaid"  generally 
means  that  the  seller  of  goods  shipped  f .  o.  b.  pays  the  freight  or  express  charges  at 
the  point  of  shipment  for  the  buyer,  and  that  the  buyer  becomes  indebted  to  the 
seller  for  the  amount.  Goods  shipped  "  f .  o.  b.  delivery  point "  means  that  the  seller 
is  to  pay  the  carrying  charges;  if  they  are  paid  by  the  buyer  the  seller  becomes  in- 
debted to  him  for  the  amount.    However,  in  any  case  it  is  a  matter  of  agreement  be- 


SUBSIDIARY   TRADING   ACCOUNTS  57 

tween  the  parties  when  the  sale  is  made  as  to  who  is  to  hear  the  expense  of  the  transporta- 
tion charges. 

182.  There  are  two  kinds  of  freight.  Incoming  freight  (or  "  freight  in  ")  relates 
to  charges  on  goods  purchased.  Outgoing  freight  (or  "  freight  out ")  relates  to  charges 
on  goods  sold. 

183.  "Freight  In"  increases  the  cost  of  goods  purchased  and  is  generally  charged 
direct  to  the  purchases  account,  no  separate  account  being  kept,  which  is  the  best 
practice.  "Freight"  or  "Freight  Out"  is  the  heading  generally  used  where  a  sep- 
arate account  is  kept  for  freight  charges  on  goods  sold,  which  are  selling  expenses  and 
do  not  relate  to  purchases  account.     (This  account  is  treated  in  detail  in  TI278). 

"FREIGHT  IN"  ACCOUNT. 

184.  If  for  any  reason  a  separate  account  for  "freight  in"  is  kept,  it  will 
show  (1)  the  cost  of  freight,  express  and  drayage  charges  paid  on  goods  purchased 
(^1446),  (2)  the  amount  (if  any)  of  these  charges  rebated  and  returned  (over- 
charges, mistakes  in  rating,  etc.)  (^145z),  and  (3)  from  these  the  net  increase  of 
cost  to  the  purchases  account  in  the  trading  statement  is  ascertained,  which  is 
shown  by  the  difference  between  the  two  sides  of  the  account,  which  should  always 
show  a  debit  balance. 

Rule  for  Debiting  and  Crediting  "Freight  In"  Account. 

185.  Debit  for  costs:  credit  for  returns. 

186.  The  various  applications  of  the  rule  are  as  follows: 

187.  Debit  freight  in  account.  188.  Credit  freight  in  account. 

a.     For  all  freight,  express  or  drayage  charg-  c.      For  all  rebates  or  other  returns  on  charg- 
es paid  by  us  on  incoming  goods.    (1(1446)  es  previously  debited  to  this  account. 

6.     For   all   freight,    express   and   drayage  (111452) 

bills  paid  by  others  for  our  account  on  d.     For  all  freight  or  express  bills  paid  by 

incoming  goods.     (111446)  us  for  others  which  have  been  charged  to 

this  account.     (1(145/) 

As  this  account  is  seldom  kept,  it  is  not  illustrated. 

189.  The  difference  between  the  two  sides  of  "Freight  In"  account  shows  a 
debit  balance,  which  is  added  to  the  cost  of  purchases  in  the  trading  statement. 

190.  To  close.  After  the  trading  statement  has  been  prepared,  this  account  is 
closed  by  a  journal  entry  which  is  made  up  from  the  items  appearing  in  the  trading 
statement.  When  the  closing  item  for  this  account  has  been  posted,  which  should 
balance  it,  then  rule  the  closing  lines  in  red  ink  and  enter  the  footings  in  black  ink, 
as  shown  in  other  similar  accounts. 


58  BOOKKEEPING   AND   ACCOUNTANCY 

WAREHOUSE  ACCOUNTS. 

191.  After  goods  are  received  there  are  two  classes  of  items  which  enter  into 
the  cost  of  handling  the  goods  while  in  our  possession  (i.  e.,  up  to  the  time  they  are 
ready  for  delivery  to  customers  or  on  board  cars)  which  add  to  the  cost  of  purchases, 
(1)  those  showing  the  cost  of  boxes,  cases,  crates,  packing  materials,  shipping  tickets, 
and  other  items  used  in  preparing  the  goods  for  shipment,  and  (2)  those  showing 
the  cost  of  the  labor  employed.  (^144d)  Separate  accounts  are  usually  kept 
although  both  classes  of  items  may  be  included  in  one  account  under  the  head- 
ing of  "Warehouse  Expense,"  in  which  case  the  details  may  be  shown  to  whatever 
extent  required  on  an  analysis  sheet,  or  they  may  be  charged  directly  to  pur- 
chases account.  When  separate  accounts  are  kept  they  may  be  designated  as 
warehouse  siipplies  and  warehouse  labor. 

WAREHOUSE  SUPPLIES  ACCOUNT. 

192.  The  object  of  this  account  when  kept  (^152)  is  to  show  the  cost  of 
shipping  materials  of  every  description  used  in  preparing  the  goods  for  market 
up  to  the  time  they  are  ready  for  delivery,  which  increases  the  cost  of  the  merchandise 
sold  in  the  trading  statement. 

Rule  for  Debiting  and  Crediting  Warehouse  Supplies  Account. 

193.  Debit  the  account  for  the  cost  of  all  materials  used  in  preparing  goods  for 
market  up  to  the  time  they  are  ready  for  delivery.  (1|144ri)  Credit  the  account /or 
a7iy  deductions  or  rebates  from  the  cost,  or  for  the  value  of  materials  taken  from  the  account. 
(•I145t) 

194.  Transactions  Illustrating  the  Application  of  the  Rule. 

(1)  F.  A.  Raymond's  transactions  for  the  month  of  January  affecting  the  ware- 
house supplies  account  were  as  follows : 

Jan.  6.  He,  purchased  boxes  amounting  to  $10.50. Jan.  9.    Repurchased 

lumber  for  the  making  and  repairing  of  boxes,  $8.40. Jan.  10.    He  paid  for 

nails,  etc.,  $1.65. Jan.  15.    He  paid  for  wrapping  paper,  S6.40. Jan.  20. 

He  purchased  boxes  for  $22.40. Jan.  26.    He  purchased  lumber  amounting  to 

$13.10. Jan.  27.    He  secured  a  rebate  of  $1.10  on  bill  for  boxes  purchased  Jan. 

20. 

What  was  the  cost  of  the  warehouse  supplies  for  the  month? 

(1)  Trace  each  transaction  in  the  illustration  shown  below. 

(2)  Prepare  a  ledger  account  like  the  illustration,  inserting  the  closing  entry 
for  the  item  $61.35,  as  shown  in  the  illustration.  Rule  the  account,  foot  and 
present  for  approval. 


WAKEHOUSE  SUTi'LlES  ACCOUNTS 


59 


Illustration  32, 


194a.  Remember  that  the  closmg  entry,  "Trading  %  to  close",  on  January  31, 
is  inserted  in  the  exercises  merely  to  show  the  account  closed.  In  keeping  a  s«t  of 
books,  this  entry  would  not  be  made  until  it  was  posted  from  tke  journal.  (^|196). 
Naming  the  items  debited  and  credited  in  the  explanation  column  jissists  in  under- 
standing the  account,  and  particularly  in  analyzing  it,  if  such  should  l-e  necessary. 
The  names  of  the  items  are  frequently  omitted,  l:owever,  in  subsidiary  accounts. 

To  Close  Warehouse  Supplies  Account. 

195.  The  difference  between  the  two  sides  of  this  account  will  show  a  del)it  l)al- 
auce,  which  is  added  to  the  cost  of  purchases  in  the  trading  statement.     (^242) 

196.  To  close.  After  the  trading  statement  has  been  prepared,  this  account  is 
closed  by  a  journal  entry  which  is  made  up  from  the  items  appearing  in  the  trading 
statement.  When  the  closing  item  for  this  account  has  been  posted,  which  should 
balance  it,  then  rule  the  closing  lines  in  red  ink,  as  shown  in  illustration  32,  and  enter 
the  footings  in  black  ink. 

196a.  Resource  and  liability  inventories  affecting  this  account  are  explained 

in  11465. 

Exercises  in  Warehouse  Supplies  Accounts. 


197.  Prepare  ledger  accounts  like  the  illustration  al>ove  for  the  following  exam- 
ples, applying  the  rule  for  each  transaction,  and  present  for  approval. 

(1)  The  Egbert  Grocery  Co.'s  transactions'  affecting  warehouse  supplies  account 
for  April  are  as  follows : 

April  3.  Boxes,  S116.19.  --9.  Barrels,  8.00.  --11.  Nails,  $4.75.  -- 
14.  Paper,  $18.45.  --15.  Twine,  $4.50.  --18.  Strap  iron,  $31.20.  --24. 
Excelsior,  $6.70.     -  -  29.    Boxes  sold  to  another  merchant,  $13.20. 

How  much  lias  this  account  added  to  the  cost  of  purchases  for  the  month? 
(7133,1[149) 


60  bookkeeping  and  accountancy 

Arithmetical  Problems — Warehouse  Account. 

(1)  The  Brown  Mfg.  Co.  purchased  the  following  warehouse  supplies  for  the 
month : 

Boxes,  S151.50;  lumber,  S34;  nails,  $3.50;  crates,  $10.20;  wrapping  paper 
$22.16;  twine,  $5.00;  strap  iron,  $21.60;  excelsior,  $9.50.  -  -  They  sold  boxes  and 
barrels,  $9.60;  returned  WTapping  paper  below  grade,  $12.50. 

To  what  extent  has  the  cost  of  merchandise  been  increased? 

(2)  The  Acme  Glass  Co.  purchased  boxes,  $216.50;  lumber,  $2619.84;  freight  on 
lumber,  $54.26;  nails,  $34;  packing  hay,  $116.40;  straw,  $71.20.     -  -  They  re- 

jeived  from  the  sale  of  boxes,  $15.20. They  used  of  the  lumber,  for  repairs 

13  the  building,  $45.20. 

• 
What  is  the  net  cost  of  the  warehouse  supplies  for  the  month? 


WAREHOUSE  LABOR  ACCOUNT 

198.  Labor  in  this  connection  means  the  wages  of  those  employed  in  opening 
boxes,  crates,  or  breaking  large  packages  and  putting  them  up  into  smaller  ones, 
and  such  other  duties  as  are  required  in  filling  the  orders  of  customers  or  in  putting 
goods  in  shape  for  the  market.  This  account  is  usually  kept  to  include  the  wages 
of  shipping  clerks,  warehousemen,  and  all  others  employed  in  preparing  and  hand- 
ling the  goods  up  to  the  time  they  are  ready  for  delivery  to  customers  or  for  ship- 
ment. 

199.  The  object  is  to  show  the  cost  of  the  labor  employed  in  preparing  goods  for 
sale  while  in  our  possession,  which  increases  the  cost  of  purchases  in  the  trading 
statement.     (Hi  52) 

Rule  for  Debiting  and  Crediting  Warehouse  Labor  Account. 

200.  Debit  the  account  for  the  cost  of  the  labor  employed,  i.  e.,  salaries  or  wages 
of  boxers,  packers,  assorters,  or  other  persons  assorting  goods  or  filling  orders.  (Tf  144d) 
Credit  the  account /or  the  value  of  any  labor  employed  elsewhere.  (Hl45i). 

201.  Transactions  Illustrating  the  Application  of  the  Rule. 

(1)  F.A.Raymond  paid  wages  of  shipping  clerks  and  warehousemen  as  fol- 
lows : 

Jan.  8.  $28.50;  Jan.  16,  $29.75;  Jan.  24,  $32.60;  Jan.  31,  $33.65.  -  -  Dur- 
ing the  month  one  of  the  warehousemen  was  employed  at  various  times  in  another 
department.    His  time  was  worth  $4.50 


WABEHOUSE  LABOR  ACCOUNTS  61 

What  was  the  cost  of  the  warehouse  labor  for  the  month? 

(1)  Trace  each  transaction  in  the  illustration. 

(2)  Prepare  a  ledger  account,  inserting  the  closing  entry  for  the  item,  $120.00 
as  shown  in  the  illustration.    Rule  the  account,  foot,  and  present   for  approval. 

ILLUSTRATION    33, 


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jro 

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3/ 

^■JTh 

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/(n 

Z'T 

7^ 

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3f 

fc^5«,2i«^  '/c^ti  tlf^^  '       • 

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7M 

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S3 

Us 

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so 

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To  Close  Warehouse  Labor  Account. 

202.  The  difference  between  the  two  sides  of  this  account  will  show  a  debit 
balance,  which  increases  the  cost  of  the  goods  purchased  in  the  trading  statement. 

203.  To  close,  read  TI196 

Exercises  in  Warehouse  Labor  Accounts. 

204.  Prepare  ledger  accounts  for  the  following  examples,  applying  the  rule: 

(1)  B.  F.  Hudson's  pay-roll  included  wages  of  boxers,  packers,  shippers,  markers, 
etc.,  as  follows:  January  31,  $250;  February  28,  $311.45;  March  31,  $350;  April  30, 
$320;  May  31,  $216.65;  June  30,  $234.17.  -  -  Labor  charged  to  this  account 
amounting  to  $37.65  was  employed  elsewhere. 

How  much  was  added  to  the  cost  of  purchases  for  the  half  year? 
Arithmetical  Problems — Warehouse  Account. 


( 1 )  The  pay-roll  of  the  Sun  Mfg.  Company  shows  wages  of  boxers  and  packers  as 
follows: -January,  $160;  February,  $175;  March,  $173.50;  April,  $119.75;  May, 
$160.50;  June,  $148.75;  July,  $80;  August,  $87.50;  September,  $141.50;  October, 

$137.50;  November,  $163;  December,  $121.50. The  account  was  credited  in 

April  for  $25,  in  September  for  $33,  and  in  December  for  $16.50,  being  the  wages  of 
packers  whose  time  was  used  for  other  purposes. 

What  was  the  net  cost  of  the  warehouse  labor  for  the  year? 


g2  BOOKKEEPING    AND    ACCOUNTANCY 

REBATES  AND  ALLOWANCES 

205.  In  the  purchase  and  sale  of  goods,  errors  in  price,  in  quantity,  or  in  grade 
of  goods  frequently  require  adjusting  entries.  In  some  lines  of  business  and  under 
some  circumstances  the  amounts  of  these  adjustments  should  appear  as  separate 
items  in  the  trading  statement.  These  adjustmentsmay  properly  be  entered  directly 
in  the  purchase  and  sales  accounts  (^145/,  ^1596),  and  if  it  is  desired  to  show 
them  separ-.tely  on  the  trading  statement,  they  may  be  classified  on  an  analj'sis 
sheet.  When  there  are  a  sufficient  number  of  these  items  to  justify  it,  separate 
rebate  and  allowance  accounts  may  be  kept  with  both  purchases  and  sales. 

Purchase  Rebates  and  Allowances  Account. 

206.  The  object  is  to  group  the  rebate  and  allowance  items  on  purchases 
under  one  heading  in  the  ledger,  instead  of  crediting  them  to  purchases  account 
and  afterwards  classifying  them  on  an  analysis  sheet. 

Rule  for  Debiting  and  Crediting  Purchase  Rebates  and 
Allowances  Account. 

207.  Read  ^145/.  There  are  no  debits  to  this  account  except  for  items  wrong- 
fully credited  to  it. 

Note  :  As  this  account  is  in  reality  a  part  of  the  purchases  account,  which  has  already  been 
explained  and  illustrated,  no  account  is  shown. 

208.  The  difference  between  the  two  sides  of  the  account  will  sliow  a  credit  bal- 
ance, which  should  be  shown  as  an  item  decreasing  the  cost  of  purchases  in  the  trad- 
ing statement.     (•[242) 

209.  To  close,  read  ^196 

Sales  Rebates  and  Allowances  Account. 

210.  This  account  is  in  every  respect  similar  to  the  purchase  rebates  and 
allowances  account,  except  that  the  items  have  the  effect  of  reducing  the  returns 
Jrom   sales. 

211.  The  object  is  to  group  the  rebate  and  allowance  items  on  sales  under  one 
heading  in  the  ledger  instead  of  charging  them  direct  to  the  sales  account  and  after- 
wards classifying  them  on  an  analysis  sheet. 


merchaxdise  discount  63 

Rule  for  Debiting  and  Crediting  Sales  Rebates  and  Allowances  Account 

212.  Road  ^[1596.  There  are  no  credits  to  this  account  except  for  items 
wrongfully  charged  to  it. 

213.  The  difference  between  the  two  sides  of  the  account  will  show  a  debit 
balance,  which  should  be  shown  as  an  item  decreasing  the  returns  from  sales  in  the 
trading  statement. 

MERCHANDISE  DISCOUNTS. 

214.  A  merchandise-  discount  is  a  percentage  deducted  from  a  bill  for  its 
prepayment  within  a  certain  specified  time  from  its  date,  which  time  is  prior  to  the 
full  term  of  credit  allowed  on  the  bill.  It  is  in  reality  the  value  of  the  use  oftlte  -money 
for  the  time  a  hill  is  paid  before  it  icould  otherwise  be  due,  which  is  calculated  as  a  cer- 
tain percentage  of  the  bill,  this  percentage  being  deducted  when  payment  is  mad  3. 

215.  The  prepayment  of  a  bill  less  discount  is  optional  with  the  purchaser  and, 
therefore,  no  entry  is  made  in  the  books  of  the  seller  until  payment  is  received.  It 
is  optional  with  the  seller  to  allow  the  discount  on  a  bill  that  is  not  paid  until  after 
the  expiration  of  the  term  of  discount.  The  ''terms"  of  the  bill  generally  indicate 
the  full  term  of  credit  allowed  on  the  bill  and  also  the  term  of  discount  (if  any), 
which  is  the  limit  of  time  from  the  date  of  the  bill  in  which  a  discount  may  be 
deducted  for  its  prepayment. 

216.  In  practice,  payment  is  usually  made  for  the  difference  only  between  the 
face  of  the  bill  and  the  discount,  but  theoretically  payment  is  made  for  the  whole 
amount  of  the  bill  and  the  value  of  the  discount  is  returned  or  paid  back  to  the 
purchaser  of  the  bill  for  the  use  of  his  money  before  it  would  otherwise  have  been 
paid. 

217.  Discounts  are  offered  for  the  prepayment  of  bills,  (a)  to  secure  prompt 
payment  of  bills  and  consequently  to  secure  the  earlier  use  of  money  to  carry  on 
the  business  of  the  concern,  and  (6)  to  reduce  the  commercial  risk  in  carrying  the 
accounts  of  customers  for  a  greater  length  of  time.  These  discounts  are  known  as 
purchase  discounts  and  sales  criscounts. 

218.  What  disposition  should  be  made  of  purchase  and  sales  discounts  ? 

(a)  Do  purchase  discounts  decrease  the  cost  of  purchases  and  thus  increase 
the  grosp  trading  profit,  which  would  class  them  as  trading  profits  to  be  shown  in  the 
trading  statement,  or  (b)  are  they  an  income  derived  from  having  sufl&cient  capital 
to  discount  bills,  which  would  class  them  as  a  capital  income  to  be  shown  in  the 
profit  and  loss  statement? 


64  BOOKKEEPING   AND   ACCOUNTANCY 

vc)  Do  sales  discounts  decrease  the  returns  from  sales  and  thus  decrease  the 
gross  trading  profit,  which  would  class  them  as  trading  losses  to  be  shown  in  the 
trading  statement,  or  (d)  are  they  expenses  incurred  to  secure  the  earlier  use  of 
money  and  to  reduce  the  risk  of  carrying  accounts  to  their  full  maturity,  which 
would  class  them  as  a  capital  expense  to  be  shown  in  the  profit  and  loss  statement? 

Th-^se  are  questions  upon  which  there  is  considerable  diversity  of  opinion  among 
accountants,  without  much  prospect  of  an  early  agreement  as  to  which  is  the  correct 
method  of  disposing  of  either. 

219.  In  the  absence  of  such  agreement,  all  of  these  methods  are  illustrated  in 
this  work,  so  that  either  may  be  employed,  de^^ending  Upon  the  nature  of  the  busi- 
ness and  the  wishes  of  the  owner,  which,  after  all,  are  important  factors  in  determin- 
ing which  method  should  be  followed. 


PURCHASE  DISCOUNTS  ACCOUNT. 

220.  Purchase  discounts  are  those  which  are  allowed  (or  returned)  to  us  for 
the  payment  of  bills  purchased. 

220a.  When  purchase  discounts  are  considered  as  decreasing  the  cost  of  pur- 
chases, they  may  be  entered  directly  to  the  credit  of  purchases  account  (^145/, 
^153)  or  a  separate  purchase  discounts  account  may  be  kept,  which  is  preferable. 
When  so  considered,  purchase  discounts  account  is  classed  as  a  subsidiary  trading 
account,  and  the  amount  of  the  purchase  discounts  shown  by  it  should  appear  in 
the  trading  statement  as  a  deduction  from  the  cost  of  purchases,  which  will  increase 
the  gross  trading  profit  or  decrease  the  gross  trading  loss  shown  by  that  statement 

2206.  When  purchase  discounts  are  considered  as  showing  an  income  derived 
from  having  the  capital  available  to  prepay  bills,  a  separate  purchase  discounts  account 
should  be  kept,  which  is  then  classed  as  a  profit  and  loss  account,  and  the  amount 
of  the  purchase  discounts  shown  by  it  should  appear  as  a  profit  in  the  profit  and 
loss  statement,  as  a  separate  item,  which  will  increase  the  net  profit  or  decrease  the 
net  loss  shown  by  that  statement. 


Rule  fok  Debiting  and  Crediting  Purchase  Discounts  Account. 

221.  Credit  Purchase  Discounts  account  for  all  discounts  on  bills  prepaid  by  us. 

222.  Observe  that  the  account  is  credited  for  the  returns  to  us  for  the  use  of 
money  given  in  discounting  our  bills.  Any  debit  items  appearing  in  this  account 
are  simply  offset  items  for  credits  to  the  account,  for  discounts  which  were  not  allowed 
to  us.     (11215) 


PURCHASE    DISCOUNTS 


65 


223.     Transactions   Illustrating   the   Rule  for  Debiting  and   Crediting 
Purchase  Discounts  Accounts. 

F.  A.  Raymond's  transactions  affecting  purchase  discounts  for  January  are  as 
follows: 

Jan.  5.  He  was  allowed  a  discount  of  $46.91 ;  Jan.  1  ?  "^27.8-i ;  Jan.  19,  $38.46 ; 
Jan.  27,  $65.80.  -  -  Jan.  20  he  debited  the  account  lo.  $5.50,  which  he  had 
deducted  on  a  bill  previously  paid,  which  was  not  allowed. 

What  were  the  total  discounts  on  purchases  for  the  month? 

(1)  Trace  each  transaction  in  the  illustration.  The  explanation  column  is 
left  vacant,  as  all  items  are  for  discounts. 

(2)  Prepare  a  ledger  account  like  the  illustration,  inserting  the  closing  entry 
"Trading  a 'c  to  close,"  as  shown  in  the  illustration.       (^225a). 


Illustration  34 

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To  Close  Purchase  Discounts  Account. 

224.  The  object  is  to  show  the  total  discounts  on  purchases. 

225.  To  close,  (a)  When  considered  as  a  subsidiary  trading  account  show- 
ing a  decrease  in  the  cost  of  purchases,  after  the  trading  statement  has  been  prepared, 
purchase  discounts  account  is  closed  by  a  journal  entry  made  up  from  the  items 
appearing  in  the  trading  statement.  When  the  item  closing  the  account  is  posted, 
the  explanation  "  Trading  %  to  close"  should  be  entered  as  shown  in  illustration  34. 
(6)  When  considered  as  a  profit  and  loss  account  showing  an  increase  in  the  net 
profits,  after  the  profit  and  loss  statement  has  been  prepared,  the  account  is  closed 
by  a  journal  entry  made  up  from  the  items  appearing  in  the  profit  and  loss  state- 
ment, in  which  case,  when  the  item  closing  the  account  is  posted,  the  explanation 
"Profit  &  Loss  %  to  close"  should  be  entered  as  shown  in  illustration  35. 
(c)  In  either  case,  when  the  closing  entry  for  this  account  has  been  posted,  which 
should  balance  it,  rule  the  closing  hues  in  red  ink  as  shown  and  enter  the  footings  in 
black  ink. 


BOOKKEEPING    AND    ACCOUNTANCY 


SALES  DISCOUNTS  ACCOUNT. 


226.  Sales  discounts  are  those  which  we  allow  to  others  for  the  prepayment 
of  l)ills  we  have  sold. 

226a.  When  sales  discounts  are.  considered  as  decreasing  the  returns  from 
sales,  they  may  be  entered  directly  to  the  debit  of  the  sales  account  (^^159c),  or  a 
separate  ^sales  discounts  account  may  be  kept,  which  is  preferable.  When  so  con- 
sidered, sales  discounts  account  is  classed  as  a  subsidiary  trading  account,  and  the 
amount  of  the  sales  discounts  shown  by  it  should  appear  in  the  trading  statement 
as  a  deduction  from  sales,  which  will  decrease  the  gross  trading  profit  or  increase 
the  gross  trading  loss. 

2266.  When  sales  discounts  are  considered  as  shomng  the  cost  of  securing  the 
earlier  use  of  money,  a  separate  sales  discounts  account  should  be  kept,  which  is 
then  classed  as  a  profit  and  loss  account,  and  the  amount  of  the  sales  discounts 
sho^^l  by  it  should  appear  as  a  loss  in  the  profit  and  loss  statement  as  a  separate 
item,  which  will  decrease  the  net  profit  or  increase  the  net  loss  shown  by  that  state- 
ment. 

Rule  for  Debiting  and  Crediting  Sales  Discounts  Account. 

227.  Debit  Sales  Discounts  account  for  all  discounts  on  bills  prepaid  by  others. 

228.  Observe  that  the  account  is  debited  for  the  cost  to  us  of  discounts  allowed 
on  sales.  Any  credit  items  appearing  in  this  account  are  simply  offset  items  for 
debits  to  the  account  for  discounts  whicn  were  not  allowed  to  others.     (^215) 

229.  Transactions  Illustrating  the  Rule  for  Debiting  and  Crediting  Sales 

Discounts  Account. 

F.  A.  Raymond's  transactions  affecting  sales  discounts  for  January  are  as 
follows : 


Jan.  5.  He  allowed  a  discount  of  $37.94;  Jan.  13,  $29.85;  Jan.  16, $41.27; 
Jan.  23,  $51.60;  Jan.  29,  $12.97.  -  -  On  Jan.  20  he  found  that  he  had  allowed 
an  over-discount  of  $2.00  on  the  item  charged  to  sales  discount  account  on  Jan.  13. 

What  were  the  total  discounts  on  sales  for  the  month? 

(1)  Prepare  a  ledger  account  like  the  illustration,  inserting  the  closing  entry 
"Trading  %  to  close,"  as  shown  in  the  illustration.     (1[231a) 


SALES  DISCOUNTS 


67 


Illustration 


^£i£&^oi-'  :.<d-€^€n^o^7^i^ 


To  Close  Sales  Discounts  Account. 

230.  The  object  is  to  show  the  total  discounts  on  sales. 

231.  To  close,  (a)  When  considered  as  a  subsidiary  trading  account  show- 
ing  a  decrease  in  the  returns  from  sales,  after  the  trading  statement  has  been  pre- 
pared, sales  discounts  account  is  closed  by  a  journal  entry  made  up  from  the  items 
appearing  in  the  trading  statement.  When  the  item  closing  the  account  is  posted, 
the  explanation  "Trading  %  to  close"  should  be  entered  as  shown  in  illustration 
36.  (b)  When  considered  as  a  profit  and  loss  account  showing  a  decrease  in  the  net 
profits,  after  the  profit  and  loss  statement  has  been  prepared,  the  account  is  closed 
by  a  journal  entry  made  up  from  the  items  appearing  in  the  profit  and  loss  state- 
ment, in  which  case,  when  the  item  closing  the  account  is  posted,  the  explanation, 
"Profit  &  Loss  %  to  close"  should  be  entered  as  shown  in  illustration  37.  In 
either  case,  when  the  closing  entry  for  this  account  has  been  posted,  which  should 
balance  it,  rule  the  closing  lines  in  red  ink  as  shown  and  enter  the  footings  in  black 
ink. 


Illustration  37. 


68  bookkeeping  and  accountancy 

Exercises  in  Purchase  and  Sales  Discounts. 

232.  Prepare  ledger  accounts  for  the  following  examples,  applying  the  rule, 
and  present  for  approval. 

(1)  Jones  &  Co.'s  purchase  discounts,  which  were  posted  to  the  ledger  account 
on  the  last  day  of  each  month,  were  as  follows: 

January,  $317.45;  February,  $287.50;  March,  $411.16;  April  ,$275.76;  May, 

$471.12;  June,  $386.45. March  10.     A  discount  taken  on  a  bill  which  was 

not  paid  until  after  the  term  of  discount,  was  not  allowed,  $26.11. May  25. 

A  similar  discount  was  not  allowed,  amounting  to  $7.42. 

What  were  the  total  discounts  on  purchases,  and  what  result  would  it  affect 
if  considered  as  a  subsidiary  account  to  the  purchases  account?  (11220a)  What 
result  would  it  affect  if  considered  as  an  income  from  capital?     (•[2206) 

(2)  Brown  Brothers  allowed  sales  discounts  for  six  months  as   follows: 

July,  $326.65;  August,  $512.62;  September,  $387.90;  October,  $216.65;  Novem- 
ber, $312.30;  December,  $516.80.     Sept.  15.     An  error  in  calculating  discount 

allowed  was  discovered,  amounting  to  an  over-allowance  of  $6.50.  A  similar  over- 
allowance  was  discovered,  November  23,  of  $3.65. 

What  were  the  total  discounts  on  sales? 

(3)  The  following  transactions  affecting  purchase  and  sales  discounts  occurred 
during  the  month  of  April.     (Open  two  accounts.) 

April  3.     Prepaid  bill  purchased,  the  discount  amounting  to  $14.60. 

April  5.  Allowed  a  discomit  on  sale  of  April  2,  $3.65. April  8.     We  prepaid 

a  bill  on  which  discount  was  $8.12 April  10.  We  allowed  a  discount  for  pre- 
payment of  bill  sold,  $13.45  April  18.  We  allowed  a  sales  discount,  amount- 
ing to  $6.41 April  20.    We  allowed  a  sales  discount  of  $3.66 April  23. 

We  prepaid  a  bill  purchased,  saving  a  discount  of  $5.75 April  26.     We  saved 

a  discount  by  prepaying   bill   purchased,  $6.66 April  30.     We   allowed  a 

sales  discount,  amounting  to  $4.50. 

What  were  the  Balances  shown  by  the  two  accounts? 

Arithmetical  Problems — Purchase  and  Sales  Discounts. 

(1)  The  following  purchase  discounts  were  allowed  us:  January,  $416.21; 
February,  $213.20;  March,  $67.89.  A  discount  amoimting  to  $24.83,  deducted 
after  the  term  of  discount  had  expired,  was  not  allowed.  What  are  the  net 
purchase  discounts  allowed  us  for  the  three  months? 


TEADING    STATEMENTS  69 

2.  We  allowed  the  following  sales  discounts :  July  $89.98;  August  $114.96; 
September  $342.25;  October  $211.88;  November  $401;  December  $740.01.  In 
one  of  these  discounts  an  error  of  $55  was  discovered  and  charged  back.  Another 
error  of  $30  was  charged  back.  What  was  the  amount  of  sales  discounts  allowed 
to  others? 

THE  TRADING  STATEMENT. 

233.  This  statement  is  made  up  from  the  priyicipal  trading  accounts  (i.  e., 
the  inventory,  the  purchases  and  the  sales  accounts)  and  the  various  subsidiary 
trading  accounts.  This  group  of  accounts  contains  all  the  facts  relating  to  the  costs 
of,  and  the  returns  from  the  commodities  bought  and  sold.  These  facts  are  arranged 
in  systematic  order  in  the  statement  with  full  explanations  and  not  infrequently 
they  are  accompanied  and  supported  by  various  supplementary  exhibits  such  as 
analysis  sheets,  comparative  statements,  etc.      (See  illustration,  1[242) 

233a.  The  explanations  and  illustrations  of  the  trading  statement,  in  this 
chapter  relate  to  the  trading  statement  and  the  accounts  of  an  ordinary  trading 
(mercantile  or  commercial)  business  in  which  merchandise  is  bought  and  sold  for 
profit.  The  trading  statement  and  special  accounts  of  manufacturing  and  other 
lines  of  business  will  be  treated  later  in  this  work. 

234.  The  object  of  the  trading  statement  is  to  show  the  gross  trading  profit 
or  the  gross  trading  loss  from  sales  for  the  fiscal  period  represented  (1[133).  Any 
account  which  affects  the  gross  trading  profit  or  the  gross  trading  loss  resulting 
from  the  sale  of  merchandise  properly  belongs  to  and  should  be  included  in  the 
trading  statement. 

235.  The  trading  statement  when  properly  made  shows  the  total  cost  of  pur- 
chases and  also  the  cost  of  merchandise  sold  on  the  debit  side  against  the  total  or  gross 
sales  and  the  net  returns  from  sales  (proceeds)  on  the  other  side. 

236.  The  cost  of  purchases  is  found  by  adding  to  the  inventory  on  hand  at 
the  close  of  the  last  preceding  fiscal  period  the  purchases  for  the  present  fiscal  period 
and  any  other  items  shown  on  the  debit  side  of  the  purchases  account  or  by  the 
subsidiary  accounts  relating  to  purchases  that  have  increased  the  cost  of  purchases. 
From  their  sum,  deduct  all  items  shown  on  the  credit  side  of  the  purchases  account 
or  by  the  sudsidiary  accounts  relating  to  purchases  that  have  decreased  the  cost 
of  purchases.    The  difference  is  the  net  cost  of  purchases.    (See  illustration  1|40.) 

237.  The  cost  of  merchandise  sold  is  the  net  cost  of  purchases  less  the  inventory 
at  the  close  of  the  fiscal  period,  which  is  showTi  in  the  trading  statement  by  deduct- 
ing the  inventory  from  the  net  cost  of  purchases. 


70 


BOOKKEEPING    AND    ACCOUNTANCY 


238.  The  returns  from  sales  are  found  by  adding  to  the  gross  sales  for  the  pres- 
ent fiscal  period,  shown  on  the  credit  side  of  the  sales  account,  any  items  shown  on  the 
credit  side  of  subsidiary  accounts  relating  to  sales  that  have  increased  the  total 
sales.  From  their  sum  deduct  all  items  shown  on  the  debit  side  of  the  sales  account 
or  by  the  subsidiary  accounts  relating  to  sales  that  have  decreased  the  total  sales. 
The  difference  is  the  net  returns  or  proceeds  from  sales.  "Net  sales"  is  the  differ- 
ences between  the  gross  sales  and  any  deductions  therefrom  for  goods  returned, 
allowances,  or  other  charges.     See  illustration  40. 

239.  The  difference  between  the  two  sides  of  the  trading  statement,  after 
deducting  the  inventory  for  the  present  fiscal  period  from  the  net  cost  of  purchases 
on  the  debit  side  (or  adding  it  to  the  credit  side),  represents  the  gross  trading  profit 
or  the  gross  trading  loss  for  the  period. 

239a.  Note — The  practice  among  American  accountants  is  to  deduct  the  closing 
inventory  from  the  debit  side  in  order  to  shov/  as  one  item  in  the  statement  the  cost  of  the 
merchandise  sold,  which  is  the  best  practice,  because  it  is  upon  the  cost  of  the  goods  sold 
that  the  rate  per  cent  of  the  gross  trading  profit  or  loss  is  calculated.  The  English  practice 
is  to  add  the  inventory  to  the  credit  side. 

240.  The  trading  statement  is  made  up  from  the  principal  and  subsidiary 
trading  accounts  shown  in  the  final  trial  balance  taken  before  closing  the  ledger. 
The  trading  accounts  constitute  one  of  the  three  groups  of  accounts  contained  in 
the  trial  balance  of  a  commercial  or  trading  business,  as  explained  in  1[484. 

241.  The  following  is  a  list  of  the  trading  accounts  and  their  balances  as  they 
appear  in  the  trial  balance  shown  in  illustration  86,  which  is  made  up  from  the 
illustrative  accounts  contained  in  this  text.  It  should  be  observed,  however,  that 
the  balances  shown  by  the  various  trading  accounts  do  not  always  agree  with  tiie 
items  shown  in  the  statement,  as  the  balances  do  not  supply  the  detailed  informa- 
tion required.  In  some  instances,  it  is  necessary  to  take  the  footings  shown  by  each 
side  of  an  account  instead  of  the  balances,  and  where  various  subsidiary  items  have 
entered  directly  into  the  purchases  and  sales  accounts,  if  it  is  desired  to  show  them 
separately  in  the  trading  statement,  it  is  first  necessary  to  classify  and  separate 
them  on  an  analysis  sheet.     The  analysis  sheet  is  fully  explained  in  1[490. 

Illustration  38. 


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TRADING    STATEMENTS 


71 


Jllustration  39. 


2148  bu.  Rye 
4745  "  Oats 
2482  "  Corn 


INVEIJTORY  JAJTOAEY  31,    19 

.84 

.511/2 
.64 


1804.32 

2443.67 
1588.48 
5836.47 


242.  The  following  illustration  (40)  shows  the  report  form  of  the  trading 
statement  made  up  from  the  accounts  contained  in  the  section  of  the  trial  balance 
shown. 


iLLUaTRAllON    40. 


^^^^^^zg^^gg^^;.-?^^^,,<::;^^S^^^^<?<^^^  /f '^IIZ^lA-r/ciz^t^y-T'Z.^^^Z'i^  ^ 


J^-jX^-t^TT^ 


._,j:Jl/^t ;-..- 


i'ZSS-'^l- 


v?/,   Zf 


Preparation  of  the  Trading  Statement. 


RETURNS. 


242a.     Explanation.     (*i[233)     The  returns  are  shown  first  in  this  form  (the 
report  form)  of  the  trading  statement.     (^238). 

(1)     Gross  sales,  $7124.38,  is  the  credit  footing  of  the  sales  account  (1[1636, 
^156).     Refer  to  illustration  27,  page  51.     Read  1[241. 


72  BOOKKEEPING   AND   ACCOUNTANCY 

(2)  Rebates  and  allowances,  $35.14,  is  the  sum  of  the  three  items  on  the  debit 
side  of  the  sales  accomit  (^1596).  If  the  sales  account  contained  a  considerable 
number  of  these  items,  they  would  be  separated  on  an  analysis  sheet  or  separate 
account  could  be  kept  for  them.  (1[167).  Refer  to  ledger  account,  illustra- 
tion 27. 

(3)  Goods  returned,  $64.13,  is  found  as  a  single  item  on  the  debit  side  of  the 
sales  account.  When  it  is  desired,  they  may  be  separated  from  any  other  items 
appearing  on  that  side  of  the  account  as  suggested  in  the  preceding  paragraph. 

(4)  The  gross  sales  (7124.38)  less  the  sum  of  the  items  for  rebates  and  allowances 
and  for  goods  returned  (35.14  +  64.13  or  99.27)  is  the  balance  (7025.11)  shown  by 
the  sales  account  which  agrees  with  the  trial  balance. 

(5)  Sales  discounts,  171.64,  deducted  from  the  balance  of  the  sales  account, 
gives  the  nef  returns  from  sales,  6853.47.  (•1164a)  If  sales  discounts  were  con- 
sidered as  a  capital  expense  (read  ^i  2206),  the  item  for  171.64  would  be  omitted  fr  m 
this  statement,  in  which  case  the  net  returns  from  sales  would  be  7025.11,  the  balance 
shown  by  the  sales  account. 

COSTS. 

(6)  (11236)  Inventory,  Dec.  31,  19~,  7516.45,  is  the  inventory  of  the  "last 
preceding  fiscal  period. "     (1[174)     See  illustration  29. 

(7)  Purchases,  3224.03,  is  the  debit  footing  of  pur-chases  account  (1I148g  1[140, 
1[141).      Refer  to  ledger  account,  illustration  24. 

(8)  Rebates  and  allowances,  27.40,  and  goods  returned,  40.16,  are  exactly  similar 
items  to  those  explained  in  paragraphs  3  and  4,  and  are  treated  in  the  same  manner 
except  that  they  are  deducted  from  costs  instead  of  from  returns.  Their  sum (67.56) 
deducted  from  the  total  purchases  (3224.03)  is  3156.47,  the  balance  shown  by  the 
purchases  account  in  the  trial  balance. 

(9)  Warehouse  supplies,  61.35,  and  warehouse  labor,  120.00,  shown  by  those 
accounts,  added  to  the  other  costs,  give  the  total  cost  of  purchases,  10854.27. 
Purchase  discounts,  173.51 ,  dedncted  gives  the  net  cost  of  purchases,  10680.76.  This 
amount,  less  inventory,  Jan.  31,  5836.47,  "the  inventory  for  the  present  fiscal 
period,"  gives  cost  of  merchandise  sold,  4844.29. 

(10)  Tha  gross  trading  profit,  2009.18,  is  the  difference  between  the  7iet  returns 
from  sales,  6853.47,  and  the  cost  of  merchandise  sold,  4844.29.     (11239). 

(11)  Prepare  a  trading  statement  like  the  one  showTi  in  illustration  40,  follow- 
ing the  explanation  (11242a)  and  present  for  approval. 

Principles  Involved  in  Making  A  Trading  Statement. 

243.  Observe  that  the  following  principles  apply  in  determining  the  gross 
trading  profit  or  the  gross  trading  loss: 


TRADING    STATEMENTS 


73 


(a)  Any  account  or  item  that  has  increased  the  cost  of  purchases  or  decreased 
the  returns  from  sales  has  decreased  the  gross  trading  profit  or  increased  the  gross 
trading  loss. 

(6)  Any  account  or  item  that  has  decreased  the  cost  of  purchases  or  increased 
the  returns  from  sales  has  increased  the  gross  trading  profit  or  decreased  the  gross 
trading  loss. 


EXPLANATION, 

Illustrati7ig  principle  24Sa,  note  that  the  items  for  "warehouse  supphes,  61.35," 
and  for  "  warehouse  labor,  120,"  amounting  to  181 .35,  increased  the  cost  of  purchases 
and,  therefore, decreased  the  gross  trading  profit  by  thatamount;  i.  e.,mthout  these 
items  the  gross  trading  profit  would  have  been  2190.53;  note  also  that  the  items  for 
"rebates  and  allowances,  35.14,"  and  for  "goods  returned,  64.13,"  amounting  to 
99. 27,  decreased  the  returns  from  sales  and,  consequently,  decreased  the  gross  trading 
profit  by  that  amount.     The  same  is  true  of  the  item  for  "sales  discounts,  171.64. " 

Illustrating  principle  2If3h  note  that  the  items  for  "rebates  and  allowances, 
27.40,"  and  for  "goods  returned,  40.16,"  amomiting  to  67.56,  decreased  the  cost  of 
purchases  and,  therefore,  irjcreased the  gross  trading  profit  by  that  amount;  note  also 
that  the  same  is  true  of  the  item  for  "purchase  discounts,  173.51."  There  is  no 
item  that  has  "increased  the  returns  from  sales"  shown  in  this  trading  statement. 

244.  The  object  of  finding  the  gross  trading  profit  is,  (a)  to  ascertain  whether 
or  not  the  department  of  the  business  (mercantile  or  manufacturing)  represented 
in  the  trading  statement  has  been  properly  managed,  as  distinguished  from  the 
other  departments  of  the  business,  such  as  the  sales  and  administration  depart- 
ments, etc.,  (6)  to  permit  of  a  comparison  of  the  gross  trading  profit  on  sales  of  one 
fiscal  period  with  that  of  another,  and  of  other  important  facts,  and  (c)  incidentally 
to  prepare  for  finding  the  net  trading  profit. 

245.  Comparisons  of  the  facts  shown  in  a  trading  statement  are  usually  made 
on  a  percentage  basis.     The  percentages  are  found  as  follows: 

(a)  The  gross  trading  profit  (or  loss)  divided  by  the  cost  of  the  merchandise  sold 
will  give  the  percentage  of  gross  profit  (or  loss)  on  sales. 

(6)  Any  account  or  item  that  has  increased  or  decreased  the  gross  trading 
profit  (or  loss)  divided  by  the  gross  trading  profit  (or  loss)  will  give  the  nercentage 
of  the  increase  or  decrease  of  the  gross  trading  profit  (or  loss)  caused  by  that 
account  or  item. 

(c)  The  same  is  true  of  any  group  of  accounts  or  items. 


74 


BOOKKEEPING   AND   ACCOUNTANCY 


To  Close  Ledger  Accounts  Shown  in  the  Trading  Statement  by  Separate 

Journal  Entry. 

246.  When  the  trading  statement  has  been  completed,  a  journal  entry  is 
prepared  from  the  statement  to  close  all  the  accounts  in  the  ledger  containing  the 
items  or  balances  shown  in  the  statement,  the  gross  trading  profit  or  the  gross  trad- 
ing loss  appearing  as  one  item  in  the  entry  to  balance  it,  which  is  transferred  to  the 
proper  side  of  the  profit  and  loss  account  in  the  ledger. 

247.  The  only  purpose  of  closing  the  various  accounts  included  in  the  trading 
statement  is  to  indicate  the  close  of  a  business  period,  and  thus  to  eliminate  them  as 
open  accounts  in  the  ledger,  preparatory  to  their  receiving  the  entries  of  a  new  busi- 
ness period. 

248.  Illustration  Jfl  shows  the  correct  journal  entries  to  close  the  accounts 
included  in  the  trading  statement  when  it  is  desired  to  open  a  trading  account  in  the 
ledger. 

248a.  Debit  trading  accounts  showing  credit  balances.  Credit  trading  accounts 
showing  debit  balances.     For  inventories  follow  ride  1^7^. 


Journal  Entries  When  Trading  Account  is  Opened  in  the  Ledger. 

Illustration   41. 


J'^'^ 


L^:l£i^ait^_ 


T 


/aj.s\  // 


r- 


/SJ-tyi.cJ^-ati^yiCyi^-C.^t^-^^'Z^  '^c^ 


/  /J  s-/ 


/3C3S  0' 


/J  03 


+ 


/20 


249.  It  will  be  noted  that  when  the  trading  account  is  opened  in  the  ledger  it 
will  be  deljited  and  credited  for  the  same  amount  and,  therefore,  will  balance.  For 
this  reason  the  trading  account  is  frequently  omitted  from  the  ledger  as  an  unneces- 
sary account,  in  which  case  the  two  journal  entries  may  be    combined  into  one 


EXERCISES    IN    TRADING    STATEMENTS 


75 


by  omitting  the  items  debiting  and  crediting  tiie  trading  account,  as  shown  in  the 
following  illustration  42  of  the  preceding  entries  combined  as  one  entry.  The  only 
objection  to  this  method  is  that  it  is  impossible  to  indicate  the  opposite  account 
debited  or  credited  in  making  the  entry  in  the  various  ledger  accounts.  "Trading 
%  to  close"  will  overcome  this  objection. 


Illustration  42. 


J^^Z^^-z-i^i^-t^Z^i^  J'/    /■f 


■  C'^e's^-e^ 


^£i-.^£^  ^/c^ 


c<i«i«^ 


^^,ff^,^¥-,„^2»^   y^C^  .'S^i.tr^iJ  ^^l<^^tl^^^>-^  .^i^i-r^c^ 


--?<.    '? 


Exercises  in  Preparing  Trading   Statements 

250.  Prepare  trading  statements  for  the  fcllowing  trading  accounts  as  they 
appear  in  the  various  trial  balances  shown,  and  present  for  approval.  The  first 
example  is  an  exact  duplication,  in  form,  of  the  trading  statement  shown  in  illustra- 
tion 40,  the  only  difference  being  in  the  amounts.  These  statements  are  pre- 
pared on  ordinary  journal  paper,  as  shown  in  the  illustration. 

1.  The  section  of  A.  W.  Wilson's  trial  balance  for  December  31,  19  ,  con- 
taining the  debit  and  credit  items  relating  to  trading  accounts,  is  shown  in  the 
illustration  below: 


Illdstration  43. 


J.f^3    /f 


(I'fg'/ 


/-z-.r 


;J /  /  z  £0^ 


v^ 


.^ 


4/^ 


/C3  ZO 


J-/Z 


^^ 


^¥ 


Additional    Information   Required  to   Prepare  the  Trading   Statement 

In  the  above  illustration,  only  the  balances  of  the  purchases  and  sales  accounts 
are  shown,  whereas  to  give  full  information  in  the  trading  statement  regarding 


76 


BOOKKEEPING  AhD   ACCOUNTANCY 


purchases  and  sales,  as  shown  in  illuslration  40,  reference  must  be  made  to  the 
accounts  in  the  ledger  to  obtain  the  amounts  which  must  appear  in  the  state- 
ment. (Read  ^241)  In  the  ledger  purchases  account  is  debited  for  total  pur- 
chases, $3010.50;  credited  for  goods  returned,  $19.14;  for  rebates  and  allowances, 
$28.17;  total,  $47.31 ;  the  difference  ($3,010.50-$47.31)  being  the  balance,  $2963.19, 
showai  in  the  trial  balance. 

In  the  ledger,  pales  account  is  credited  for  gross  sales,  $6824.50;  debited  for 
goods  returned,  SI 2. 30;  for  rebates  and  allowances,  $56.91;  total,  $69.21;  the 
difference  ($6824.50-$69.21)  being  the  balance,  $6755.29,  shown  in  the  trial 
balance. 

The  inventory  at  the  close  of  the  present  fiscal  period,  December  31,  is  $5147.96. 

From  the  figures  shown  in  the  trial  balance,  supplemented  in  the  case  of  the 
purchase  and  sales  accounts  by  those  taken  from  the  ledger,  as  given  above,  pre- 
pare a  trading  statement  showing  the  gross  trading  profit.  Then  prepare  two 
journal  entries, — one  which  will  open  the  trading  account  in  the  ledger  (•;248), 
and  one  which  will  omit  the  trading  account  in  the  ledger  (1[249),  and  present 
for  approval. 

Suggestion.  The  purpose  of  the  closing  journal  entry  may  be  further  illustrated 
by  opening  a  ledger  account  for  each  of  the  trading  accounts  named  in  the  section 
of  the  trial  balance  show^l  in  illustration  38  and  then  posting  the  amounts  shown  in 
the  closing  journal  entry  to  these  accounts,  which  will  balance  all  of  the  Ipdger 
accounts  excepting  the  inventory  account,  Avhich  will  show  the  amomit  of  the 
inventory  at  the  close  of  the  present  fiscal  period,  and  the  profit  and  loss  account 
which  will  show  the  gross  trading  profit. 

(2)  Harvey  &  Son's  trial  balance  shows  the  following  trading  accounts  at  the 
semi-annual  closing  of  their  books,  June  30,  19 — .  The  inventory  on  that  date 
was  $29,336.45. 

Prepare  a  trading  statement  showing  the  gross  trading  profit,  with  the  proper 
journal  entry  to  close  when  a  trading  account  is  opened  in  the  ledger. 


iLLUSTRATlON    44. 


^_t,L/,-Cii,<.-<^-t<'-*-^^Z^ 


'/fO 


(3)  The  trading  accounts  showTi  in  the  trial  balance  of  Hope  &  Hemphill, 
taken  December  31,  19 — ,  are  as  follows: 

Prepare  the  trading  statement  and  the  journal  entry  to  close,  omitting  the 
trading  account  in  the  ledger. 

Note  that  separate  accounts  are  kept  for  purchase  and  sales  rebates  and  allow- 
ances, and  that  the  balances  sho\Mi  by  purchases  and  sales  accounts,  therefore,  show 
total  purchases  and  total  sales.  The  inventory  at  the  close  of  the  present  fiscal 
period   is   $8990.60. 


TRADING     STATEMENTS 


77 


Illustration  45. 


-^r     t 


6.^....^           ; 

f^JS 

J^ 

2Z3(>'^ 

^y 

/■V^l-Ti? 

J^a 

-2i? 

/2ZO 

3/C 

VjS- 

2g  3^3  77 

-?-?r|V^:l 

(4)  The  Chase  Company's  trial  balance  for  the  quarterly  fiscal  period  ending 
September  30  showed  the  following  accounts  and  balances: 

Prepare  a  trading  statement  showing  the  gross  trading  profit  for  the  period, 
and  a  journal  entry  to  close  the  trading  accounts  without  opening  a  trading  account 
in  the  ledger.     The  inventory  was  $49312.30. 


Illustration 


/l-t-C'^t<:,<^^L^c:2-<i-£</ 


(5)  In  Peterson  &  Company's  books,  all  items  affecting  the  cost  of  purchases 
were  entered  directly  into  the  purchases  account.  The  various  items  charged  and 
credited  to  that  account  were  classified  on  an  analysis  sheet,  with  the  following 

results: 

Total  purchases  $66719.25;  incoming  freight,  express  and  drayage  charges, 
$793.50  (^1446);  duties,  storage  and  other  similar  charges,  $3670;  purchasing 
agents'  commissions  and  salaries,  $1600  (^144c) ;  warehouse  expenses,  $2150.  (1|191, 
^144(i);  purchases  returned,  $250  (1[145c);  rebates  and  allowances  on  pur- 
chases, $378.50  (11145/);  goods  shipped  for  sale  on  commission,  at  cost  price, 
$1200  (^145/i);  rebates  allowed  onincoming  freight  bills  paid,  $66  (1[145/).  The 
inventory  at  the  close  of  the  last  fiscal  period  was  $9845;  total  sales,  $59,718.50; 
discounts  allowed  on  sales,  $928.75.  The  inventory  at  the  close  of  the  present 
fiscal  period  is  $26,750. 

The  following  is  the  section  of  the  trial  balance  showing  these  accounts  as  they 
appear  in  the  ledger: 


78 


BOOKKEEPING   AND   ACCOUNTANCY 


IlLUSI  RATION    47 


(a)  Prepare  the  purchases  account,  showing  the  balance  contained  in  the 
trial  balance,  indicating  the  various  items  in  the  explanation  columns. 

(6)  Prepare  a  trading  statement  exhibiting  in  detail  the  above  information 
shown  by  the  accounts. 

(c)  Prepare  a  journal  entry  closing  the  trading  accounts  in  the  ledger  with- 
out opening  a  trading  account. 

(d)  "What  is  the  cost  of  the  merchandise  sold?  What  is  the  gross  trading 
profit? 

(e)  If  the  present  inventory  were  $23345.50,  what  effect  would  it  have  upon 
the  result  shown  by  the  trading  statement?     (^243) 

(6)  At  the  close  of  the  first  year  of  their  business,  the  trading  accounts  in  the 
books  of  Melton  &  Dane  show  the  following  results: 

Total  purchases,  $41315;  total  sales,  $39816;  returned  sales,  $450;  warehouse 
bxpenses,  $475;  warehouse  labor,  $950;  sales  discounts,  $245.  There  was  no  inven- 
tory at  the  beginning  of  business.     The  present  inventory  is  $7863. 

(a)  From  this  data,  prepare  the  section  of  the  trial  balance  showing  the  trad- 
ing accounts. 

(6)     Prepare  a  trading  statement  showing  the  gross  profit  on  sales. 

(c)  Prepare  the  journal  entry  to  close  the  accounts  without  opening  a  trad- 
ing account  in  the  ledger. 


Arithmetical  Problems— Trading  Accounts  and  Statements. 


(1)  Inventory  at  the  beginning  of  the 
fiscal  period,  $5350;  total  purchases,  $9650; 
returned  purchases,  $214;  incoming  freight, 
$226;  Avarehouse  expense,  $975.  The  present 
inventory  is  $4896;  total  sales,  $13120;  re- 
turned sales,  $149.  What  is  the  net  cost  of 
purchases?  (If 236)  What  is  the  cost  of  mer- 
chandise sold?  (^237,  What  are  the  net  re- 
turns from  sales?  (1|238)  What  is  the  gross 
trading  profit?     (1(239) 


ydc^-^AXc^eryty 


^,^iU<s 

jjc^.^^^ 

-z-i  <;. 

9  7^' 

/  0  2-0   '  . 

/  3  /  It-O. 
'  f   O  Q  /, 

/  -yT*?, 


(2j     Inventory  at  the  beginning  of  the  fiscal  period,  $6750;  purchases,  $27315, 
freight  charges,  $226;  duties,  $112;  warehouse  supplies,  $133;  warehouse  labor; 


PROFIT    AND    LOSS    ACCOUNTS  79 

S375;  purchase  rebates  and  allowances,  $328.75;  returned  purchases,  S95;  purchase 
discounts,  $212;  total  sales,  $32421.50;  sales  discounts,  $516;  returned  sales,  $428.75. 
There  is  no  inventory  at  the  close  of  the  fiscal  period,  as  the  goods  were  all  sold. 

What  is  the  net  co^t  of  purchases.''  (123G)  What  is  the  cost  of  the  mer- 
chandise sold?  (•'237)  What  are  the  net  returns  from  sales?  What  is  the  gross 
trading  profit  or  loss? 

(3)  Inventory  account  is  debited  for  $8650.  Purchases  account  is  debited 
for  $39,423.50;  credited,  $1126.12.  Purchasing  agent's  commission  and  expenses, 
$628;  warehouse  expenses,  .$2065;  duties,  $845;  merchandise  shipped  for  sale  on 
commission,  at  cost,  $1600;  purchase  discounts,  $894.  Inventory  at  the  close  of 
the  fiscal  period,  $7833.48;  total  sales,  $43,318.60;  sales  discounts,  $1225;  returned 
sales,  $983. 

What  was  the  net  cost  of  purchases,  cost  of  merchandise  sold,  the  net  returns 
fi'om  sales,  and  the  gross  trading  profit  or  gross  trading  loss? 

(4)  Prepare  arithmetical  solutions  of  exercises  1,  2,  3,  4,  5  and  6  following 
^250,  and  present  for  approval. 

PROFIT  AND  LOSS  ACCX:)UNTS. 

251 .  Profit  and  loss  accounts  are  those  accounts  which  show  the  sources  of  the 
various  expenses  and  incomes  of  every  description  which  result  from  conducting  a 
business.  They  all  have  the  effect  of  increasing  or  diminishing  the  capital  of  the 
concern. 

251a.  Profit,  in  an  accounting  sense,  is  the  excess  of  income  from  all  sources 
over  expenses  and  losses  from  all  sources. 

252.  Losses  and  gains  come  from  three  general  sources: 

(a)  From  the  purchase  and  sale  or  the  manufacture  and  sale  of  commodities, 
which  are  shown  in  the  trading  accounts. 

(6)  From  the  current  expenses  and  incomes  incidental  to  carrying  on  the  busi- 
ness, which  are  shown  in  various  accounts  and  groups  of  accounts  in  which  are 
recorded  the  cost  of  and  the  returns  from  the  use  of  property  and  things  and  the 
services  of  persons,  such  as  selling  expenses,  administrative  expenses,  rent,  interest, 
discount,  commission,  collection  and  exchange,  and  other  similar  accounts  which 
may,  therefore,  be  designated  under  the  general  name  of  use  and  service  accounts. 

(c)  From  special  and  extraordinary  expenses  and  incomes,  such  as  insurance, 
taxes,  bad  debts,  repairs  and  renewals  to  buildings,  rentals,  purchase  and  sale  of 
properties  and  all  other  similar  items,  depending  upon  the  nature  and  extent  of  the 
business. 


80  BOOKKEEPING   AND    ACCOTTNTANCY 

253.  All  profit  and  loss  accounts  show  losses  and  gains  relatively,  because  the 
costs  of  expenses  or  other  losses  shown  in  one  account  may  be  offset  by  the  returns 
from  incomes  or  other  sources  of  gain  shown  in  another  account. 

254.  All  the  losses  and  gains  of  a  concern  could  and  may  be  entered  directly 
into  the  profit  and  loss  account,  but  in  order  to  designate  the  sources  of  the  various 
expenses  and  incomes,  they  should  be  classified  either  under  separate  accounts  or 
on  analysis  sheets,  so  that  they  may  be  shown  in  the  profit  and  loss  statement  in 
such  detail  as  may  be  desired. 

255.  The  principal  sources  of  profit  in  an  ordinary  trading  business  are  shown 
in  the  various  trading  accounts  from  which  the  trading  statement,  showing  the 
gross  trading  profit,  is  prepared.  This  statement  has  already  been  described  in 
^233  to  250  inclusive.  In  a  manufacturing  business  a  similar  statement  is  prepared , 
which  includes,  however,  various  additional  details  shown  by  the  manufacturing 
accounts. 

256.  The  profit  and  loss  statement  shows  the  losses  and  gains  from  all  sources, 
including  the  gross  trading  profit  (or  gross  trading  loss)  shown  by  the  trading  state- 
ment, the  object  being  to  show  the  net  profit  or  the  7iet  loss  for  the  fiscal  period 
included  in  the  statement. 

257.  The  sources  of  all  expenses  and  incomes  and  of  all  losses  and  gains  are  of 
the  utmost  importance  in  economical  and  profitable  business  management.  The 
principal  purpose  of  modern  accountancy  is  to  supply  such  information  to  the 
business  manager  as  will  enable  him  to  conduct  a  successful  business,  which 
means  a  profitable  business. 

258.  It  is  for  this  reason  that  the  services  of  the  professional  accountant  have 
become  so  important  in  the  organization  of  business  concerns.  He  is  expected 
to  devise,  install,  and  put  into  operation  a  system  of  accounts  for  any  particular 
business  that  will  give  those  units  of  information  which  will  set  forth  accurately 
and  in  such  detail  as  is  necessary  all  the  facts  and  results  which  will  assist  the 
management  to  administer  its  affairs  intelligently. 

259.  It  is  from  a  comparison  of  the  results  shown  for  the  different  periods  for 
which  the  business  has  been  conducted  that  past  mistakes  in  management  may  be 
avoided  and  new  policies  may  be  inaugurated. 

260.  The  units  of  information  which  are  necessary  and  useful,  as  well  as  the 
detail  in  which  they  are  shown,  vary  greatly  in  different  lines  of  business,  depend- 
ing upon  its  nature,  its  organization,  and  its  extent.  What  might  be  an  impor- 
tant item  or  unit  of  information  in  one  ba'^iness  would  be  unimportant  in  another: 


PROFIT   AND    LOSS   ACCOUNTS  gj 

for  instance,  while  a  knowledge  of  the  cost  of  each  of  the  general  expenses,  such  as 
fuel,  light,  office  expenses,  insurance,  etc.,  might  be  necessary, for  the  good  manage- 
ment of  one  business,  yet  in  another  business  these  details  would  be  unimportant. 
The  same  is  also  true  of  selling  expenses,  administration  expenses,  and  all  other 
sources  of  profit  and  of  loss. 

261.  The  student  of  accounts  should  endeavor  to  ascertain  those  units  of  infor- 
mation which  are  most  important  and  useful  in  each  line  of  business.  This  is 
fundamental  to  the  organization  of  accounting  systems.  The  object  of  this  work 
is  to  train  the  student  not  only  in  the  art  of  bookkeeping,  but  also  in  the  organiza- 
tion of  systems  of  accounting  suitable  for  various  lines  of  business,  in  so  far  as  this 
is  possible. 

CURRENT  EXPENSES  AND  INCOiMES  :    USE  AND  SERVICE  ACCOUNTS. 

262.  After  goods  are  purcliased  and  prepared  for  sale,  when  their  cost  ends 
(^141)  the  selling  expenses  begin.  Selling  expenses  consist  of  salesmen's  salaries 
and  commissions,  salesmen's  traveling  expenses,  the  cost  of  samples  and  of  sample 
cases,  advertising  in  all  its  forms,  delivery  expenses,  and  all  other  expend' tures 
incidental  to  selling  the  goods. 

263.  Salesmen's  salaries  and  commissions  and  drivers'  wages  are  paid  for 
services  rendered.  Traveling  expenses  are  paid  for  services  rendered  by  railroads, 
hotels,  etc.  The  outlays  for  sample  cases,  sample  goods,  premiums,  etc.,  represent 
the  cost  of  materials  used  in  effecting  sales.  Advertising  expenses  are  paid  for  ser- 
vices rendered  by  newspapers,  magazines,  and  of  printed  matter  and  other  materials 
used  in  effecting  sales.  Delivery  charges  represent  the  use  of  horses,  wagons,  and 
commercial  motor  vehicles  in  delivering  goods,  and  the  services  of  drivers,  chauf- 
feurs, etc. 

SELLING  EXPENSE  ACCOUNTS. 

264.  All  selling  expenses  may  be  entered  in  one  account  under  an  appropri- 
ate title,  such  as  "Sales  Expense"  or  "Selhng  Expense."  When  the  various 
selling  expenses  are  to  be  shown  separately  in  the  profit  and  loss  statement,  they 
may  be  classified  to  whatever  extent  desired  by  distributing  them  on  an  analysis 
sheet  (11490). 

265.  Separate  accounts  xnay  be  kept  with  any  or  all  the  various  selling  expenses, 
if  it  is  so  desired.  It  is  usual  to  keep  separate  accounts  with  the  more  important 
items  such  as  salesmen's  salaries  and  commissions,  traveling  expenses,  advertising, 
delivery  expenses,  freight  out,  etc. 


82 


BOOKKEEPING   AND   ACCOUNTANCY 


Rule  for  Debiting  and  Crediting  Selling  Expense  Accounts. 


266.     Debit  selling  expense  accounts  for  costs:  credit  for  returns. 


266a.  Debit  selling  expense  accounts  for 
the  cost  of  uses,  of  services,  and  of 
materials  employed  in  selling  goods. 


2666.  Credit  selling  expense  accounts  for 
the  returns  from  any  uses,  services,  or 
materials  previously  charged  to  these 
accounts. 


267.     The  various  applications  of  the  rule  are  as  follows: 


268.  Debit  selling  expense  accounts  under 
appropriate  titles, — 

0.  For  salesrnen' s  salaries. 

b.  For  salesmen'' s  cimimissions . 

c.  For  salesmen's  traveling  expenses. 

d.  For  cost  of  sample  cases,  sample  goods, 

etc. 

e.  For  cost  of  premiums  given  away  to 
stimulate  the  sale  of  goods. 

/.     For  the  cost  of  all  advertising . 

g.  For  delivery  expenses  and  charges, 
drivers'  wages,  etc.,  in  retail  and  depart- 
ment stores,  etc.     (11289) 

h.  For  branch  office  expenses,  mercantile 
references,  etc. 

1.  For  outward  freight,  express  and  dray- 

age  charges  (1(278) 
j.     For  wrapping  materials  such  as  paper, 

twine,  etc.,   and  for  wrappers'  wages, 
k.     For  storage  in  outside  warehouses,   of 

goods  ready  for  shipment. 

270.  Observe  that  in  every  instance 
selling  expense  accounts  are  debited 
for  the  cost  of  the  uses,  services  and 
materials    expended  in  selling   goods. 


269.  Credit  selling  expense  accounts 
under  appropriate    titles, — 

1.  For  any  returns  for  uses,  services,  and 
materials  charged  to  these  accounts 
or  employed  for  other  accounts,  or  for 
any  overcharges  or  rebates  on  items 
charged  to  these  accounts. 

SUGGESTION. 

Separate  accounts  may  be  kept  for  any 
one  or  more  of  the  items  indicated  in  the 
opposite  column,  depending  upon  the  extent 
of  the  business  and  the  number  of  items  of 
the  same  kind  which  occur.  When  separ- 
ate accounts  are  kept,  they  are  treated  in 
every  respect  exactly  the  same  as  you  have 
been  instructed  for  the  sales  expense 
account.  Freight  account  11278  and  de- 
livery expense  account  1|289  are  examples 
of  separate  selling  expense   accounts. 


271'.  Observe  that  in  every  instance  selling 
expense  accounts  are  credited  for  the 
returns  from  the  cost  of  any  use,  service, 
or  material  charged  to  these  accounts. 


272.     When  separate  accounts  are  kept  for  any  one  or  more  of  the  items  enum- 
erated in  268a  to  A;  inclusive,  appropriate  titles  are  indicated  by  the  words  in  italics. 

273.     Transactions   Illustrating   the  Various  Applications  of  the   Rule 
(^266)  FOR  Debiting  and  Crediting  Selling  Expense  Accounts. 


Mr.  Raymond's  transactions  affecting  the  sales  expense  account  are  as  follows: 

Jan.  3.     He  paid  for  sample  cases,  $22.35.     (1I268d) Jan.  4.     He  paid 

for   premiums,    $27.65.     (^268e) Jan.   8.     He   paid   for   advertising,   $39. 


PROt'IT   AND   LOSS   ACCOUNTS 


83 


(p68/)  -  -Jan.  31.  He  paid  for  delivery  charges,  $3d.  (*i2G8«)  -  -  J^n 
^roAQ?f  ^"^'^  salesmen's  salaries,  $120  (^[268a);  salesmen's  commissions,  $10 
Ir  ^fToii/T?"'^^'  travehng  expenses,  $30.90  (!|268c);  for  mercantile  references. 
Jb  { ,\Zbm) ;  tor  outward  freight  on  goods  sold  f.o.b.  delivery  point,  $12  50  i*^2Q8i)  ■ 
for  wrapping  paper  and  twine,  $8  (1I268j);  for  storage  in  an  outside  warehouse  of 
l^'So  '7^2690  '^'P"'^''^'  ^^-    ^^2^^^)     Received  cash  for  one  small  sample  case, 


What  was  the  cost  of  the  various  selling  expenses  for  the  month? 

EXERCISi!:. 

273a.     Prepare  a  ledger  account  for  the  preceding  transactions,  as  follows: 

(1)  Read  and  study  each  transaction  carefully,  referring  to  the  special  appli- 
cation  ot  the  rule  for  debiting  and  crediting  purchases  account  indicated  by  the 
paragraph  number.  ^ 

(2)  Apply  the  rule  (Tf266)  and  make  the  proper  debit  and  credit  entries  in  the 
sales  expense  account,  indicating  in  the  explanation  column  the  nature  of  each 
Item,  as  shouii  m  the  illustration.     When  completed,  submit  for  approval. 

Illustration  49. 


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lllh.  Illustration  49  shows  the  account  as  it  appears  January  31,  when  footed 
preparatory  to  taking  the  trial  balance. 

273c.  Illustration  50  shows  the  account  as  it  appears  after  the  profit  and  loss 
statement  has  been  prepared  and  the  journal  entry,  closing  the  profit  and  loss 
accounts,  has  been  posted,  at  which  time  the  accounts  ruled  and  footed  as  shown 


84 


BOOKKEEPING    AND    ACCOUNTANCY 


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To  Close  Selling  Expense  Accounts. 

274.  The  object  of  these  accounts  is  to  show  the  net  cost  of  the  various 
expenses  of  the  sales  department  and,incidentall3%the  amount  that  is  to  be  deducted 
from  the  gross  selling  profit,  as  shown  by  the  trading  statement,  in  order  to  ascertain 
the  net  selling  profit,  SiS  shown  by  the  profit  and  loss  statement. 

275.  The  difference  between  the  two  sides  of  a  sales  expense  account  shows 
the  7iet  cost  of  making  sales  for  the  period,  which  is  a  loss  that  should  be  shown  as 
a  separate  item  (or  items)  in  the  profit  and  loss  statement. 

276.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  the 
sales  expense  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit  and 
loss  statement.  When  the  closing  item  to  each  sales  expense  account  has  been 
posted,  which  should  balance  the  account,  rule  the  closing  lines  in  red  ink  as  shown 
in  illustration  50,  and  enter  the  footings  in  black  ink. 


276a. 
in  ^465. 


Resource  and  liability  inventories  affecting  these  accounts  are  explained 


Exercises  in  Sales  Expense  Accounts. 


277.  Prepare  ledger  accounts  showing  the  account  closed  like  illustration  50 
for  the  following  examples,  applying  the  rule  (11266)  for  each  transaction.  Indi- 
cate ])riefiy  in  the  explanation  column  the  nature  of  each  item. 

(1)  Dec.  31.  The  sales  expenses  of  the  Richards  Grocery  Conipan}-,  for  the 
year  are  as  follows: 

Salesmen's  salaries,  $1500;  il  xlesmen's  traveling  expenses,  $846.15;  commission 
allowed  to  agents,  $341.60;  sample  cases,  $85;    sample  goods,  $216.25;  premiums, 


PROFIT   AND    LOSS    ACCOUNTS  85 

$180.67;  advertising  circulars,  $218.90;  newspaper  advertising,  $116.45;  postage 
for  mailing  advertising  matter,  $190;  printing  order  books,  $60;  wages  of  drivers 
delivering  goods,  $480;  horse  feed,  $126.50;  horse  shoeing,  $23.25;  delivery  wagon 
repairs,  $31.75;  branch  office  salaries,  $720;  wrapping  paper  and  twine, $65. 30; 
wages  of  wrappers,  $211.60;  show-room  rent. 


What  is  the  net  cost  of  the  various  expenses  of  the  sales  department  for  the 
year? 

(2)  The  selling  expenses  for  the  Jones  Mercantile  Company  for  the  half  year 
ending  June  30  are  as  follows: 

Salesmen's  salaries,  $1200;  traveling  expenses,  $618.26;  sample  cases,  $45; 
sample  goods,  $185.30;  premiums,  $216.50;  advertising,  $175.16;  order  books,  $25; 
wrapping  paper,  $45.60;  delivery  automobile  supplies  and  repairs,  $213.70;  wages 
of  chauffeurs,  $600.  The  services  of  a  salesman  were  used  as  a  purchasing  agent 
to  the  amount  of  $300.     (1[2690 

What  is  the  net  cost  of  the  sales  expenses  for  the  period? 

Arithmetical  Problems — Sales  Expense  Account. 


(1)  The  Ritter  Grocery  Company's  selling  expenses  for  the  quarter  ending 
September  30  are  as  follows: 

Salesmen's  salaries,  $900;  salesmen's  traveling  expenses,  $316.75;  sample 
goods,  $165;  premiums,  $137.50;  printed  matter  for  advertising,  $111.60;  postage 
$80;  drivers'  wages,  $300;  horse  feed,  $75;  horse  shoeing,  $18;  wagon  repairs, 
$26.30.  Sample  goods  were  sold  amounting  to  $57.50.  The  delivery  wagon  was 
used  in  hauling  goods  purchased  to  the  amount  of  $78.75.  Wrapping  paper  was 
used  in  re-casing  goods  purchased  to  the  amount  of  $12. 

What  is  the  net  cost  of  the  selling  expenses  for  the  period? 

(2)  The  Brown  Shoe  Company's  sales  expense  accounts  show  the  following 
footings  for  the  fiscal  year  ending  December  31: 

Salesmen's  commissions  %,  debit,  $1567.18;  credit,  $9.60.  Sample  goods 
%,  debit,  $216.40;  credit,  $21.50.  Advertising,  debit,  $262.81.  Delivery  expense 
%,  debit,  $387.90.     "Freight  out"  %,  debit  $86.50;  credit,  $4.12. 

What  is  the  net  cost  of  the  selling  expenses  for  the  period? 

OUTGOING  FREIGHT  EXPRESS  DRAYAGE,  ETC. 

278.  "Freight"  or  "freight  out"  is  the  heading  used  where  a  separate  account 
is  kept  for  freight  charges  on  goods  sold,  which  is  a  selling  expense.     (1l268i)    It 


86 


BOOKKEEPING  AND  ACCOUNTANCY 


includes  all  freight,  express,  drayage,  cartage,  and  other  charges  incurred  in  the 
delivery  of  goods  to  the  consignee  by  the  consignor  (i.e.,  the  seller  to  the  buyer) 
from  the  time  the  selling  expenses  begin,  which  in  a  wholesale  or  jobbing  business 
is  from  the  time  ivheii  the  goods  are  made  ready  for  delivery  to  the  local  customer,  or  on 
hoard  cars  for  shipment,  or  inaretail  business /rom  the  time  the  goods  are  ready  for  sale. 

279.  The  object  is  to  show  (1)  the  cost  of  freight,  express  and  drayage  charges 
paid  on  goods  sold,  (2)  the  amount  (if  any)  'of  these  charges  rebated  and  returned 
(overcharges  from  mistakes  in  rating,  etc.),  and  (3)  from  these  to  determine  the 
amount  to  be  deducted  from  the  gross  profit  on  sales  to  ascertain  the  tiet  profit  on 
sales  in  the  profit  and  loss  statement,  which  is  shown  by  the  difference  between  the 
two  sides  of  "Freight  Out"  account,  which  should  always  show  a  debit  balance. 

280.  This  is  the  only  separate  freight  account  usually  kept,  as  freight  on  pur- 
chases is  properly  chargeable  to  that  account,  therefore, ' '  freight "  account  is  generally- 
understood  by  accountants  to  relate  only  to  freight  outward.  This  account  can 
be  omitted  by  debiting  the  items  directly  to  sales  expense  account  (Tf268i;) 

Rule  for  Debfting  and  Crediting  "Freight  Out"  Account. 


281.     Debit  for  costs:  credit  for  returns. 
The  various  applications  are: 
282.     Debit  freight  out  account, — 

a.  For  all  freight,  expres.s  and  drayage 
charges  paid  by  us  on  goods  delivered. 
to  local  customers  and  on  goods  after 
they  are  placed  on  board  cars  for  ship- 
ment to  out  of  town  customers. 

b.  For  all  freight,  express  and  drayage 
bills  paid  by  others  for  our  account  on 
outgoing  goods. 

284.  Observe  that  in  every  instance  the 
account  is  debited  for  the  cost  of 
charges. 


283.     Credit  freight  out  account,— 

c.     For   all    rebates   or    other    returns    on 

charges     previously     debited     to     this 

account. 


285.     Observe  that  in  every  instance  the 
account  is  credited  for  any  returriK. 


286.     The  transactions  for  the  items  sIkjwu  in  the  following  account  are  not 
given,  as  they  are  all  similar  and  easily  distinguished  from  other  selling  expenses. 


Illustration  51. 


-^^'^^^t-^^^.jj^C^^ 


PROFIT   AND    LOSS   ACCOUNTS  87 

287.  The  difference  between  the  two  sides  of  "Freight  Out"  account  will 
show  the  cost  of  freight,  etc.,  on  goods  sold,  which  is  a  selling  expense  that 
should  appear  as  an  item  in  the  "sales  expense"  section  of  the  profit  and  loss 
statement.     (Illustration  87) 

287a.  Note  that  the  difference  between  the  two  sides  of  a  "  Freight  In  "  account 
will  show  a  debit  balance,  which  should  appear  as  an  item  increasiiig  the  cost  of  pur- 
chases in  the  trading  statement. 

288.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  this 
account  is  closed  by  a  journal  entry  which  is  made  up  from  the  entries  appearing  in 
the  profit  and  loss  statement.  When  the  closing  item  for  this  account  has  been 
posted,  which  should  balance  it,  then  rule  the  closing  lines  in  red  ink  and  enter  the 
footings  in  black  ink. 

288a.  As  this  account  is  in  every  respect  similar  to  the  sales  expense  account, 
shown  in  illustrations  49  and  50,  separate  exercises  are  not  deemed  necessary. 

2886.  Resource  and  hability  inventories  affecting  this  account  are  explained 
in  11465. 

DELIVERY  EXPENSE  ACCOUNT. 

289.  Delivery  expense  account  is  a  separate  account  for  a  class  of  items  that, 
if  preferred,  may  be  charged  directly  to  sales  expense  account.  (^268{/)  It  is  kept 
to  show  the  cost  of  maintaining  and  operating  the  "delivery  equipment, "  (1f428) 
such  as  costs  of  repairs  and  renewals  of  the  equipment,  feed  supplies,  drivers  or 
chauffeurs'  wages,  gasoline  and  oil  for  automobiles,  and  all  other  items  that  enter 
into  the  cost  of  delivering  goods. 

290.  The  cost  of  delivering  goods  is  a  selling  expense  that  should  appear  as  an 
item  in  the  "sales  expense"  section  of  the  profit  and  loss  statement,  which  is  the 
reason  for  keeping  a  separate  account  for  the  items  charged  to  it. 

290a.  Delivery  expenses  must  not  be  confused  with  drayage  charges.  De- 
livery expenses  include  all  charges  on  outgoing  goods  from  the  time  the  goods  are 
ready  for  delivery  to  the  local  customer  or  on  board  cars  for  shipment,  while  drayage 
charges  include  all  charges  on  incoyning  goods  from  depots  and  wharfs  up  to  the  time 
the  goods  are  ready  for  sale,  which  should  be  included  in  the  cost  of  purchases  in 
the  trading  statement.     (11141,  111446,  1|146) 

2906.  When  the  same  teams,  automobiles,  etc.,  are  used  for  hauling  the 
goods  "received  as  well  as  the  goods  delivered,  delivery  expense  may  be  charged  for 
the  whole  amount  during  the  fiscal  period.  At  the  end  of  the  fiscal  period  these 
ex-penses  should  be  pro  rated.  A  better  method  is  to  pro  rate  the  expenses  monthly, 
because  the  division  would  likely  be  more  nearly  correct  when  made  monthlj''  than 
when  permitted  to  lie  over  until  the  end  of  the  fiscal  period. 


88 


BOOKKEEPING   AND   ACCOUNTANCY 


Rule  for  Debiting  and  Crediting  Delivery  Expense  Account. 

291.  Debit  delivery  expense  account  for  costs:  credit  for  any  returns  from  items 
charged  to  that  account. 

292.  The  various  applications  of  the  rule  are  as  follows: 


293.     Debit    delivery  expense   account, — 

a.  For  the  cost  of  repairs  and  renewals  of 
the  delivery  equipment. 

b.  For  current  supplies  consumed,  such 
as  feed  and  bedding  for  horses,  gasoline 
and  oil  for  automobiles,  etc. 

c.  For  drivers'  wages,  bridge  or  ferry 
tolls,  and  for  any  other  items  that 
enter  into  the  cost  of  delivering  goods. 


294.     Credit  delivery  expense  account, — 

d.  For  any  returns  from  the  sale  of  items 
previously  charged  to  this  account. 

e.  For  any  returns  or  income  for  the  use 
of  the  delivery  equipment  by  others. 

/.  For  the  proportion  of  these  expenses 
which  should  be  charged  to  the  pur- 
chases account  for  drayage  on  incom- 
ing goods. 


295.  The  difference  between  the  two  sides  of  a  delivery  expense  account  shows 
the  net  cost  of  delivery  expense  for  the  period,  which  is  a  loss  that  should  be  shown 
in  the  sales  expense  section  of  the  profit  and  loss  statement. 

296.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  in  which 
the  results  shown  by  this  account  should  appear  as  a  separate  item  in  the  sales 
expense  section,  it  is  closed  by  a  journal  entry  made  up  from  the  profit  and  loss 
statement.  When  the  closing  item  to  the  account  has  been  posted,  which  should 
balance  the  account,  rule  the  closing  lines  in  red  ink  and  enter  the  footings  in 
black  ink. 


296a. 

in  t465. 


Resource  and  liability  inventories  affecting  this  account  are  explained 


ADMINISTRATION  EXPENSE  ACCOUNT. 


297.  Administration  expenses  are  the  expenses  incurred  in  the  general  manage- 
ment of  a  business  considered  as  a  whole,  such  as  the  salaries  of  officers  and  man- 
agers and  of  office  help,  the  cost  of  office  supplies,  postage,  stationery,  travel- 
ing expenses,  and  such  other  miscellaneous  expenditures  as  relate  to  the  general 
management  of  the  business. 

297a.  Salaries  of  officers  and  office  help  and  traveling  expenses  represent 
the  cost  of  services  rendered.  Postage  represents  the  cost  of  a  service  rendered 
by  the  government.  Office  supplies,  stationery,  etc.,  represent  the  cost  of  materials 
wserf. 

298.  A  single  account  under  the  head  of  "Administrative  Expense  "  may  be 
kept.  If  it  is  desired  to  show  these  expenses  separately  in  the  profit  and  loss  state- 
ment, the  items  may  be  classified  on  an  analysis  sheet;  or  separate  accounts  with 
the  various  classes  of  items  may  be  kept  in  the  ledger,  if  preferred. 


profit  and  loss  accounts  89 

Rule  for  Debiting  and  Crediting  Administrative  Expense  Accounts. 

299.  Debit  administrative  expense  accounts  for  costs:  credit  for  returns. 

300.  The  various  applications  of  the  rule  are  as  follows: 

301.    Debit     an     administrative    expense  302.    Credit     the    proper    administrative 

account,  under  an  appropriate  title, —  expense    account, — 

a.  For  officers  and  managers'  salaries.  /.     For  any  returns  from  the  services  or 

b.  For  salaries  or  wages  of  office  help.  materials    charged    to    that    account, 

c.  For  office  supplies,  stationery,  postage,  or  for  any  overcharges  or  rebates  on 
telephone  and  telegram  charges.  items  charged. 

d.  For  traveling  expenses  of  officers  or 
employees   of   this   department. 

e.  For  any  miscellaneous  expenses  of  the 
administration,  such  as  legal  expenses, 
directors'    fees,   etc. 

303.     Observe     that     in    every     instance  304.     Observe    that     in    every    instance 

administrative    expense    accounts    are  administrative    expense    accounts    are 

debited    for   the    cost  of   services   and  credited  for  the  returns  from  the   cost 

materials  used  in  that  department.  of  any  use,  service  or  material  charged 

to   them. 


305.     Transactions  Illustrating  the  Various  Applications  of  the   Rule 
(^299)  FOR  Debiting  and  Crediting  Administrative   Expense  Accounts. 

Transactions  for  January  affecting  administrative  expense  account  are  as 
follows : 

Jan.  8.  Paid  for  office  supplies,  S17.50.  (1[301c)  -  -  Jan.  12.  Paid 
traveling  expenses,  $3.60.  (llSOld)  -  -  Jan.  16.  Paid  for  legal  advice,  $10. 
(•[301e)  -  -  Jan.  24.  Paid  for  telegrams,  $1.60.  (^301c)  -  -  Jan.  31.  Paid 
salaries  of  office  help,  $100.    (•i3016)     -  -  Jan.  31.    Paid  manager's  salary,  $150. 

(11301a) Jan.  31.     The  services  of  one  of  the  office  clerks  were  loaned  to  the 

sales  department  to  the  amount  of  $7.70     (^302/). 

What  was  the  cost  of  the  administrative  expenses  for  the  month?     (1|307) 


exercise 
305a.     Prepare   a  ledger  account  for  the   preceding  transactions. 

(1)  Before  entering  each  transaction,  refer  to  the  special  application  of  the 
rule  indicated  in  the   paragraph  number. 

(2)  Then  make  the  proper  debit  and  credit  entries  in  the  administrative 
expense  account,  applying  the  rule  ^299.  When  completed,  submit  for  approval. 


90 


BOOKKEEPING  AND  ACCOUNTANCY 


Illustration  52. 


(A^^s^^yyi^i'vr^i^d'^^l'tzZZ'iAe/  CL.<i:y^2^^yz.<d-€>^ ^ 


f9 


i^r 


//  so      Gz^.  J/  ^^ 

J  Co 3/ jSt^yj^Y^Tii-c^ 


7  7^ 

27^    ~- 


/OO 


^o 


/so 


z^x  yo 


xt2  i  70 


To  Close  Administrative  Expense  Accounts. 

306.  The  object  of  administrative  expense  accounts  is  to  show  the  net  cost  of 
the  various  expenses  of  the  administration   department. 

307.  The  difference  between  the  two  sides  of  an  administrative  expense  account 
is  the  net  cost  of  the  administrative  expenses  for  the  period  covered  in  the  account, 
which  is  a  loss  that  should  appear  as  a  separate  item  (or  items)  in  the  profit  and 
loss  statement. 

308.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  admin- 
istrative expense  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit  and 
loss  statement.  When  the  closing  item  to  any  administrative  expense  account  has 
been  posted,  which  should  balance  the  account,  rule  the  closing  lines  in  red  ink  as 
shown  in  illustration  52  and  enter  the  footings  in  black  ink. 

308a.  Resource  and  liability  inventories  affecting  these  accounts  are  explained 
in  1465. 

Exercises  in  Administrative  Expense  Accounts. 

309.  Prepare  ledger  accounts  showing  the  accounts  closed  like  illustration  52 
for  the  following  examples,  applying  the  rule  (1299)  for  each  transaction.  No 
illustration  is  shown,  as  this  account  is  in  every  way  similar  to  the  one  shown  in 
illustration  52.  Indicate  briefly  in  the  explanation  column  the  nature  of  each 
item.  • 


(1)  The  Adams  County  Glass  Company  paid  salary  of  manager,  S3000; 
salary  of  bookkeeper  and  stenographer,  S1200;  stationery  and  office  supplies, 
$157.10;  postage,  $122;  telephone  and  telegrams,  $71.05;  directors'  fees,  $500; 
legal  expenses,  $200;  extra  office  help,  $150;  traveling  expenses  of  general  officers, 
$346.18.  They  received  a  rebate  on  railroad  ticket,  $12.50.  Received  for  use  of 
our  telephone  for  long  distance  calls  by  other  people,  $2.60. 


GENERAL    EXPENSE    ACCOUNTS  91 

What  was  the  net  cost  of  administrative  expenses  for  the  year? 

(2)     The  Sun  Mfg.  Company's  administrative  expenses  were  as  follows: 
Salaries  of  management,  $5000;  salaries  of  office  help,  $1800;  stationery  and 

office  suppUes,  $142.75;  postage,  $130;  telephone  and  telegrams,  $81.50;  legal 

expenses,  $50;  miscellaneous  traveling  expenses,  $86.19. 

What  was  the  net  cost? 

Arithmetical  Problems — Administrative  Expense   Accounts. 

(1)     The  Jones  &  Brown  Mfg.  Company's  expenses  for  the  year  were: 

Salary  of  manager,  $4000;  salaries  of  office  help,  $1600;  stationery,  $96.45; 
postage,  $150;  telegrams  and  telephone,  $92.35;  directors'  fees,  $700;  legal  expenses 
traveling  expenses,  $167.18. 


(2)  The  Midland  Rolling  Mill  Company  paid  manager's  salary,  $2500;  office 
help,  $975;  letter  heads  and  envelopes,  $60;  postage,  $72.30;  telephone  and  tele- 
grams, $61.25;  directors'  fees,  $250;  attorneys'  fees  for  collecting  accounts,  $75; 
traveling,  $30;  banquet  for  officers,  $75. 


GENERAL  EXPENSE  ACCOUNTS. 

310.  An  expense  is  the  cost  of  any  use  or  service  from  which  no  definite  per- 
manent value  is  derived;  the  cost  of  anything  that  is  used  up  in  conducting  a  busi- 
ness. General  expenses  consist  of  all  expense  items  which  are  not  included  in  the 
sales,  administrative,  manufacturing  or  other  special  expense  accounts,  such  as 
the  cost  of  rent,  fuel,  light,  taxes,  insurance,  and  miscellaneous  items  of  similar 
character. 

311.  A  single  account  under  the  head  of  ''  General  Expense, "  or  "  Expense, " 
may  be  kept,  or  separate  accounts  may  be  kept  in  the  ledger  with  any  one  or  more 
of  the  items,  if  desired.  Insurance  expense  account  ^340  is  an  example  of  a  separate 
general  expense  account.  If  a  single  account  is  kept  and  it  is  desired  to  showtheitems 
separately  in  the  profit  and  loss  statement,  they  may  be  classified  on  an  analysis 
sheet. 

311a.  A  single  account  for  all  expense  items,  including  selling,  administra- 
tive, manufacturing,  and  all  other  special  and  general  expenses,  may  be  kept 
under  the  heading,  "Expense,"  if  it  is  not  convenient  or  desirable  to  keep 
separate  accounts  for  the  different  classes  of  expense  items.  This  is  frequently 
advisable  in  small  concerns.  Wlien  the  expense  account  is  so  kept,  the  items 
may  be  subdivided  and  classified  to  any  extent  desired,  either  monthly, 
quarterly,  or  annually,  on  analysis  sheets  (1(490) ,  which  permits  of  the  various 
statements  being  prepared  showing  as  much  detail  as  if  separate  accounts  were 
kept  in  the  ledger  for  each  class  of  expense  items. 


92  BOOKKEEPING    \ND    ACCOUNTANCY 

3116.  It  should  be  remembered  that  there  is  no  other  good  reason  for 
opening  separate  accounts  for  the  different  expense  items  than  to  show  the  cost 
of  the  various  expenses  separately  in  the  trading  and  profit  and  loss  statements. 
When  detailed  information  regarding  expenses  is  not  necessary  in  the  manage- 
ment of  a  business,  it  is  a  useless  waste  of  time  to  classify  expense  items  under 
numy  accounts.  Where  the  volume  of  business  is  of  considerable  size,  however, 
separate  accounts  should  be  kept  with  selling,  administrative,  and  general 
expenses. 

Rule  for  Debiting  and  Crediting  General  Expense  Accounts. 

312.  Debit  general  expense  accounts  for  costs:  credit  for  returns. 

313.  The  various  applications  of  the  rule  are  as  follows: 

314.     Debit   expense,    under   a  general  or  315.     Credit   expense,   under  a  general   or 

special   heading, —  special  heading, — 

a.     For  rent,  fuel  and  lighl,  taxes,  insurance  h.     For   any   returns   from   expense   itema 

and  other  miscellaneous  items  of  simi-  charged  to  general  expense  accounts, 
lar  character. 

316.     Observe   that  in  every  instance   the  317.     Observe  that   in   every  instance  the 

account  is  debited  for  the  cost  of  a  use  or  account  is  credited  for  the  returns  from 

service  received.  a  use  or  service  previously  charged  to 

the  account. 

318.  Separate  accounts  may  be  kept  for  any  one  or  more  of  the  items  shown  in 
italics  in  ^3 14a. 

319.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 
(11312)   FOR  Debiting  and  Crediting  General  Expense  Accounts. 

The  following  are  the  general  expenses  paid  for  the  month: 

exercise. 

Jan.  10.  Coal,  SI  1.50.  (T314a)  -  -  Jan.  14.  Team  License,  S3. 75.  -  - 
Jan.  18.  Letter  Box,  SI. 50.-  -  Jan.  31.  Electric  light,  $3.81;  rent,  S90;  rented 
space,  sub-let,  S25.00.     (^3156). 

What  are  the  total  general  expenses  for  the  month?      (1(322). 

320.  Prepare  a  ledger  account  for  the  preceding  transaction  like  illustration 
53,  and  present  for  approval. 


QENEliAL    EXPENSE    ACCOUNTS 


93 


Illdstbation  53. 


^jS^ym^^^  C^<?'^/yi^^/'y 


Qxaa4. 


7- ^JZ^h'^zz^ 


To  Close  General  Expense  Account. 


321.  The  object  of  this  account  is  to  show  the  cost  of  the  different  general 
expenses  incurred  in  conducting  the  business. 

322.  The  difference  between  the  two  sides  of  a  general  expense  account  shows 
the  net  cost  of  the  general  expenses  for  the  period,  which  is  a  loss  that  should  appear 
as  a  separate  item  (or  items)  in  the  profit  and  loss  statement. 

323.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  general 
expense  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit  and  loss 
statement.  When  the  closing  item  to  any  general  expense  account  has  been  posted, 
which  should  balance  the  account,  rule  the  closing  lines  in  red  ink,  as  shown  in 
illustration  53,  and  enter  the  footings  in  black  ink. 

323a.  When  insurance  premiums  are  charged  to  general  expense  account  for 
policies  which  do  not  expire  within  the  fiscal  period  represented  in  the  account,  the 
premium  value  of  the  unexpired  policy  should  be  inventoried  and  general  expense 
account  should  be  credited  for  the  amount.  (Read  "Resource  Inventories," 
'^468a)  This  method  will  have  the  result  of  placing  the  cost  of  insurance  in  the 
period  to  which  it  belongs.  Another  method  of  disposing  of  insurance,  which  is 
preferred  by  accountants,  is  given  under  the  heading  of  "Insurance  Account," 
•[327. 


3236. 
in  ^465. 


Resource  and  liability  inventories  affecting  these  accounts  are  explained 


Exercises  in  General  Expense  Accounts. 

324.  Prepare  ledger  accounts  for  the  following,  showing  the  accounts  closed 
like  illustration  53,  indicating  briefly  in  the  explanation  column  the  nature  of  each 
item  entered. 


94  BOOKKEEPING   AND   ACCOUNTANCY 

(1)  The  following  are  the  expenses  of  Arthur  Jones  for  January: 

Rent,  $100;  coal,  $17.50;  gas,  $30;  electric  light,  $6.50;  insurance  premiums 
paid,  $48;  taxes,  $75.84;  city  directory,  $9;  street  car  fares,  $7.15. 

(2)  Charles  F.  Davison  had  the  following  expenses  for  February: 

Rent,  $125,  coal,  $5.60;  gas,  $45.60;  electric  light,  $8.96;  taxes,  $100;  rebate 
on  gas  bill  $2.15;  city  directory,  $8;  car  tickets,  $5. 

Arithmetical  Problems — General  Expense  Accounts. 
Charles  A.  Bell's  expenses  were  as  follows: 

Rent,  $125;  coal,  $26.50;  gas,  $27.50;  taxes,  $57.21;  insurance  premiums  paid, 
$36;  extra  space  rented,  $25;  directory,  $8.  What  was  the  net  cost  of  expenses  for 
the  period? 

George  Robinson  had  the  following  expenses:  ^ 

Rent  $200;  gas,  $113.75;  electric  light,  $21.75;  taxes,  $98.43;  cleaning  windows 
$2 .  50;  insurance,  $75;  desk  space  rented  to  others,  $12;  city  directory,  $5;  meals  for 
employees,  $12.    What  was  the  net  cost? 

Edward  Kelly  paid  during  the  month  of  April  the  following  expenses ; 

Rent,  $35;  gas,  $8.75;  electric  light,  $4.50;  taxes,  $7.56;  insurance  premium, 
$12;  rebate  on  insurance  premium,  $4;  street  improvement  assessment,  $14.87; 
city  directory,  $6.    What  were  the  total  expenses? 


INSURANCE  ACCOUNT. 
(Unexpired  Insurance  Premiums) 

325.  Insurance  is  a  protection  against  loss  which  is  guaranteed  by  insurance 
companies  u])on  the  payment  of  a  premium  based  upon  a  percentage  of  the  amount 
insured. 

326.  There  are  two  methods  of  disposing  of  insurance  transactions.  One  is  to 
charge  the  premiums  paid  to  the  general  expense  account,  as  explained  in  t314a, 
11318  and  T323a. 


INSURANCE    ACCOUNT  95 

327.  The  preferred  method  generally  followed  by  accountants,  which  is  the 
method  here  explained,  is  to  debit  imurance  account  with  the  cost  of  all  premiums 
paid  on  policies,  whether  fire,  boiler,  tornado,  or  indemnity,  and  to  credit  that 
account,  at  the  end  of  each  month,  quarter  or  year,  or  at  the  end  of  a  fiscal  period, 
for  the  yremium  value  of  the  insurance  which  has  expired  or  has  been  canceled,  the 
balance  shown  by  the  account  being  a  resource  (asset)  equal  to  the  value  of  the  uw 
expired  premium  value  of  the  insurance  policies  in  force.  When  all  policies  have  ex 
pired  or  have  been  canceled  and  have  been  credited,  this  account  will  balance. 

328.  The  insurance  which  has  expired  under  this  method  is  debited  to  ai^ 
insurance  expense  account,  which  is  explained  in  the  next  chapter,  ^340. 

329.  The  premium  value  of  the  insurance  which  has  expired  is  found  by  divid- 
ing the  premium  on  each  policy  in  the  proportion  of  the  expired  time  (in  months)  to 
the  total  time  covered  in  the  policy.  For  instance,  in  a  policy  for  one  year,  the 
premium  on  which  is  $75,  the  premium  value  which  -will  expire  for  each  month  is 
one-twelfth  of  $75,  or  $6.25.  If,  when  the  books  are  closed  at  the  end  of  a  fiscal 
period,  seven  months  of  the  twelve  for  which  the  policy  is  written  have  expired,  the 
expired  premium  value  of  the  policy  would  be  $43.75,  which  should  be  charged  to 
expired  insurance  account.  This  would  leave  an  unexpired  premium  value  on  that 
policy  of  $31.25,  which  would  be  shown  in  the  balance  of  the  insurance  account. 

330.  The  purpose  of  crediting  insurance  account  monthly  or  at  the  close  of 
each  fiscal  period  for  the  expired  premium  value  of  the  policies  is  to  have  the  cost 
of  insurance  for  each  month  or  fiscal  period  appear  in  the  trial  balance  or  the 
profit  and  loss  statement  covering  the  period  for  which  the  protection  was  received. 

Rule  for  Debiting  and  Crediting  Insurance  Account. 

331.  Debit  insurance  account  for  costs:  credit  for  returns. 

332.  The  various  applications  of  the  rule  are  as  follows: 

333.     Debit  insurance  account,- —  334.     Credit  insurance  account, — 

a.     For  the  cost  of  all  premiums  paid  in  b.     For    the    proportion    of    the    expired 

advance.  premium  value  of  insurance  which  has 

expired  or  been  canceled  in  the  month 
or  the  fiscal  period  covered  by  the 
trial  balance  or  by  the  profit  and  loss 
statement  in  which  it  is  to  appear. 

c.  For  any  rebates  on  premiums  allowed 
or  for  any  returns  from  open  policies. 

d.  For  allowances  on   premiums  of  can- 
celed policies. 


96 


BOOKKEEPING    AND    ACCOUNTANCY 


335.  When  premiums  are  not  paid  until  the  expiration  of  policies,  i.e.,  not 
paid  in  advance,  they  should  be  charged  directly  to  insurance  expense  account  (^341) 
or  to  the  general  expense  account. 

336.     Transactions    Illustrating    the    Rule    (TSSl)     for    Debiting    and 
Crediting  Insurance  Account. 

Jan  1.  Placed  insurance  in  the  American  Insurance  Company  for  $6000, 
Dolicv  No.  21316,  at  the  rate  of  $1.50  per  $100,  for  one  year— insurance  prenimm 
paid,  $90.  (^333a)  -  -  Jan.  31.  The  expired  premium  value  ot  the  above 
policy  for  one  month  is  one-twelfth  of  $90,  or  $7.50.     (3346) 

What  is  the  unexpired  premium  value  of  the  policy  Jan.  31,  and  the  expired 
premium  value?     (11337) 


exercise. 
336a.     Prepare  a  ledger  account  for  the  preceding  transactions. 

Illustration  54. 


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Pa^>^, 


54 


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^^^^^tfefetf^ 


c^t-^b^-.-^Li-eA'ti^'^^ 


7 


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^^  f" 


337.  The  difference  shown  by  the  insurance  account  is  the  current  premium 
value  of  the  unexpired  policies  on  hand  which  should  appear  as  a  resource  in  tlie  state- 
ment of  resources  and  liabiUties. 

338.  To  close.  An  insurance  account  is  not  usually  closed  unless  it  is  desired 
to  show  the  value  of  the  premiums  on  unexpired  policies  in  one  item,  when  the 
difference  should  be  entered  in  red  ink,  or  when  it  is  necessary  to  forward  the 
account  to  another  page.  To  close  the  account,  first  find  the  difference,  then  eiiter 
on  the  credit  side  in  red  ink,  (a)  the  amount  of  the  difference,  (6)  the  date,  and  (c) 
the  word,  "Balance."  Then  rule  and  foot  the  account,  as  shown  in  illustration 
54  and  bring  down  the  balance  on  the  opposite  side  (in  black  ink), entering  the  date 
of  the  next  business  day.  If  it  is  necessary  to  forward  the  account  to  another  page, 
instead  of  bringing  the  balance  down,  forward  it  to  the  opposite  side  of  a  new 


INSURANCE    ACCOUNTS  97 

page,  entering  the  numl)er  of  the  new  page  to  which  the  account  is  transferred  in 
tiie  page  column.  In  the  new  account  in  the  page  column  enter  the  page  from  which 
the  account  was  transferred.  When  all  insurance  policies  have  expired  and  have 
been  charged  off,  this  account  will  balance. 


Exercises  in  Insurance  Accounts. 

339.  Prepare  ledger  accounts  for  the  following,  showing  the  accounts  closed 
like  illustration  54,  bringing  down  the  balance  on  the  opposite  side  of  the  account, 
as  instructed  in  ^338,  and  present  for  approval. 

(1)  Jennings  Brothers  placed  the  following  insurance  on  their  stock: 

March  1,  $8000,  for  one  year  at  1%,  $80  (^333a) ;  Aug  1,  $6000,  for  one  year  at 
U':o,$75;  Nov.  1,  $1000,  for  one  year  at  li%  premium,  $12.50.  At  the  closeofthe 
fiscal  year,  December  31,  the  expired  premium  value  on  the  policy  of  March 
1,  for  ten  months,  at  $6.66§  per  month,  is  $60.07;  on  the  policy  of  August  1,  for 
five  months,  at  $6.25permonth,  $31.25  ;onthe  policy  of  November  1,  for  two  months, 
at  $1.04  per  month,  $2.08;  total,  $100.      («^3346) 

What  is  the  premium  value  of  the  unexpired  policies  on  hand?  (11337) 

(2)  Harris  Carter  placed  insurance  on  his  stock  as  follows:  January  2,  $5000; 
March  15,  $2000;  April  1,  $3000.  Each  policy  is  for  one  year,  and  the  premium  is  at 
the  rate  of  960  per  $100.  July  1,  he  canceled  the  policy  of  January  2  for  the  unex- 
pired time,  receiving  rebate,  $20,  being  at  the  rate  of  400  per  $100  (![3346,  *[f334c/). 

,  What  was  the  unexpired  premium  value  of  the  policies  in  force  at  the  end  of  the 
fiscal  year,  December  31,  and  what  was  the  balance  shown  by  the  insurance  account? 

(3)  Johnson  &  Davis  placed  insurance  on  their  stock  as  follows: 

Jan.  4,  $4000;  Feb.  28,  $2000;  March  25,  $6000;  July  7,  $3000;  Nov.  1,  $2000; 
Nov.  1,  $2000.  Each  policy  is  for  one  year  from  date,  and  the  premium  is  at  the 
rate  of  $1.08  per  $100.  They  desire  that  the  insurance  account  be  credited  monthly 
for  the  amount  of  the  expired  premium  value,  on  these  poUcies. 

What  is  the  current  premium  value  of  the  unexpired  policies  on  hand  Dec.  31? 

Note:  To  find  the  exact  expired  piemium  value  for  less  than  a  month,  divide  the  amount 
for  one  month  on  the  basis  of  thirty  days.  If  exact  value  is  not  required,  if  less  than  one- 
half  month,  do  not  count;  if  one-half  month  or  more,  count  as  one  month. 


98 


BOOKKEEPING   AND   ACCOUNTANCY 


INSURANCE  EXPENSE  ACCOUNT. 
{Expired  Insurance  Premiums.) 

340.  Insurance  expense  account  is  kept  to  show  the  amount  of  premiums 
which  have  expired  during  the  month  or  other  period  represented  in  the  account, 
which  have,  therefore,  become  an  expense.  The  debit  items  to  this  account  are 
contra  to  the  credit  items  in  the  insurance  account,  i.  e.,  this  account  is  debited  and 
insurance  account  is  credited  monthly,  or  for  any  other  period,  for  the  pro  rata 
expired  premium  value  of  insurance  policies.  Insurance  expense  account  is,  there- 
fore, in  a  sense,  a  companion  account  of  the  insurance  account. 

341.  Insurance  expense  is  also  debited  with  all  assessments  on  mutual  policies 
for  premiums  that  are  not  paid  until  the  expiration  of  policies,  such  as  ''blanket" 
policies,  etc. 


Rule  for  Debiting  and  Crediting  Insurance  Expense  Account. 

342.  Debit  insurance  expense  account  for  costs:  credit  for  returns. 

343.  The  various  applications  of  the  rule  are  as  follows : 


345.     Credit  insurance  expense, — 

c.     For    any    returns    from    payments    on 

expired    premiums     charged    to     this 

account. 


344.  Debit  insurance  expense,  monthly  or 
at  the  close  of  the  fiscal  period, — 

a.  For  the  expired  premium  value  of 
insurance  policies  in  force. 

b.  For  premiums  paid  on  mutual  policies, 
or  for  premiums  not  paid  until  expira- 
tion of  policies. 

346.  Transactions    Illustrating   the   Various    Applications  of  the  Rule 
(1(342)  FOR  Debiting  and  Crediting  Insurance  Expense  Account. 

Jan.  31.     As  shown  in  the  second  transaction,  1336,  the  expired  pr:>miuni 
value  of  the  policy  referred  to  for  one  month  is  $7.50.     (T|344a) 

Illustsation  56. 


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INSURANCE    EXPENSE    ACCOUNT 
EXERCISE. 


99 


Prepare  a  ledger  account  showing  the  expired  premium  value  of  the  policy  for 
January,  like  illustration  55. 


Illustration  55. 


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— T^^ri 


Ct3^^^./t.e^j[,,uyjy%'n/t<£^_ 


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a'^  JL^\  J/[>gy<^/s^%zi^c.i^ 


s-=^ 


347.  To  close.  Insurance  expense  account  shows  the  expired  premium  value  of 
the  insurance  policies  in  force  for  the  period  covered  in  the  account,  which  is  a  loss 
that  should  appear  as  a  separate  item  in  the  profit  and  loss  statement.  See  illus- 
trations 64  and  65.  After  the  profit  and  loss  statement  has  been  prepared,  this  ac- 
count is  closed  by  a  journal  entry  made  up  from  that  statement.  When  the  closing 
item  to  the  account  has  been  posted,  which  should  balance  the  account,  if  more  than 
one  item  appears  on  either  side  of  the  account,  rule  the  closing  lines  in  red  ink  and 
enter  the  footings  in  black  ink  as  shown  in  illustration  54.  If  but  a  single  item  ap- 
pears on  each  side  of  the  account,  rule  the  closin-i"  lines  as  shown  in  illustration  55, 
as  there  are  no  footings  to  be  entered. 

348.  This  account  may  be  omitted  from  the  ledger  by  chpTging  the  items  to 
the  general  expense  account. 

349.  Prepare  ledger  accounts  showing  the  expired  premium  value  on  policies 
named  in  transactions  1,  2,  and  3,  1[339,  and  present  for  approval. 

350.  The  following  is  a  simple  form  of  an  insurance  record  book,  showing  the 
monthly  expiration  of  premiums.  By  omitting  the  columns  for  each  month,  this 
book  may  be  similarly  used  to  show  the  expired  premium  value  on  insurance  poli- 
cies at  the  close  of  any  fiscal  year  or  period. 


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100  BOOKKEEPING   AND    ACCOUNTANCY 

INTEREST  AND   DISCOUNT. 

351.  The  use  of  money  is  interest.  When  the  use  of  money  is  paid  fur  after  the 
use  is  received,  it  is  called  interest;  when  the  use  is  paid  for  before,  it  is  received  it 
is  called  discount.  Discount  is  interest  paid  in  advance.  This  is  really  the  only  differ- 
ence in  the  terms  and  for  that  reason  a  single  account  under  the  title  of  "  Interest" 
is  usually  kept  for  both  interest  and  discount.  Separate  accounts  may  be  kept  with 
"Interest "  and  with  "Discount, "  or  they  may  be  combined  under  the  head  of  "In- 
terest &  Discount, "  or  the  interest  derived  from  a  particular  source  maybe  kept  in 
a  separate  account,  as  "Interest  on  Borrowed  Capital,"  or  "Interest  on  Loans." 

351a.  Illustration.  If  A  borrows  $100  from  B  f or  one  year  at  6%  interest,  at 
the  expiration  of  that  time  {after  he  has  received  the  use  or  interest)  he  will  return 
SlOO  to  B  plus  $6,  or  $106.  The  $100  is  in  payment  of  the  loan.  The  $6  is  in  pay- 
ment for  the  use  (interest)  of  $100  for  one  year.  If  the  $6  is  deducted  from  the  $100 
when  the  loan  is  made,  it  is  then  called  discount,  because  it  is  paid  in  advance,  or 
before  the  borrower  has  had  the  use  of  the  money. 

352.  In  a  bookkeeping  sense  interest  is  understood  to  refer  to  money  borrowed 
to  increase  the  capital  of  the  business  or  to  money  loaned  from  the  surplus  funds 
of  the  business.  Interest  on  loans  should  be  distinguished  from  discounts  on  pur- 
chases and  sales.     (1f214) 

352a.  Interest  on  partners^  capital  is  not,  strictly  speaking,  an  expense  of  con- 
ductingthe  business  and  therefore  shouldnot  be  debited  to  interest  account.  Instead 
it  is  generally  treated  as  a  direct  charge  to  profit  and  loss  account.  Interest  on  part- 
ners'capital  may  be  eliminated  entirely  from  both  the  interest  and  the  profit  and  loss 
accounts  by  considering  the  total  interest  due  the  partners  as  a  liability  of  the  firm, 
debiting  each  partner  for  his  share  and  crediting  each  partner  for  the  interest  owed 
to  him. 

353.  Interest  is  calculated  on  interest  bearing  notes  from  the  date  on  which 
they  begin  to  draw  interest  to  the  date  they  are  due.  Discount  is  calculated  for  the 
exact  number  of  days  from  the  date  of  discount  to  the  date  due.  Interest  bearing 
notes  are  discounted  for  the  amount  of  the  note,  which  is  the  face  of  the  note  plus 
the  interest.  The  amount  of  the  note  less  the  discount  equals  the  proceeds.  On 
open  accounts  interest  is  calculated  from  the  date  on  which  the  account  (or  items) 
is  due  until  the  date  c  i  which  it  is  paid. 

354.  A  clear  understanding  of  interest  will  be  had  in  connection  with  any  trans- 
action if  the  student  will  ask  the  question, "  Do  we  receive  the  use  of  money  borrowed 
or  loaned,  or  do  we  give  the  use  of  it?"  If  we  receive  the  use,  it  is  a  debit  to  interest 
account  (^[28);  if  we  give  the  use,  it  is  a  credit  (1[29). 

355.  The  use  received  or  given  must  not  be  confused  with  the  money  received 
or  paid.  It  is  the  use  that  is  received  or  given,  and  the  use  is  paid  for  in  cash  or 
otherwise  like  any  other  commodity. 


interest  and  discount 
Rule  for  Debiting  and  Crediting  Interest  Accounts. 
356.     Debit  interest  accounts  for  costs:  credit  for  returns. 


101 


356ct.     Debit  interest  .accounts  for  the  cos^ 
of  the  use  of  money  received. 


3566.     Credit    interest    accounts    for  the 
returns  from  the  use  of  money  given. 


357.  The  various  applications  of  the  rule  are  as  follows : 


358.      Debit    interest,    under    the    proper 
title,— 

a.  For  all  interest  accrued  and  owing  to 
us  from  others  on  notes  receivable, 
*bonds,  accounts,  or  other  claims  at  the 
beginning  of  business,  which  will  be 
credited  to  this  account  when  received. 

b.  For  the  use  of  money  (interest)  received 
by  us  on  our  notes  (notes  pay.),  accounts 
etc.,  and  for  which  we  pay  or  allow 
credit. 

c.  For   the   use   of   money    (discount)    re- 

ceived by  us  on  notes  and  time  drafts 
that  are  diwcounted  for  us  by  others. 

d.  For  the  use  of  money  (discount)  received 
by  us,  when  others  prepay  their  own 
notes  or  acceptances  (notes  rec.)  in 
our    favor. 

€.  For  the  use  of  money  received  by  us 
(discount)  on  notes  and  drafts  we 
transfer  to  others  before  maturity,  for 
purchases  or  on  account. 

/.  For  accrued  interest  owing  to  others  at 
the  close  of  the  fiscal  period,  as  shown 
by  the  inventory  of  accrued  interest 
-payable   (^4086). 

g.  For  accrued  interest  owing  to  us  at  the 
cloi^e  of  the  last  preceding  fiscal  period, 
as  shown  by  the  inventory  of  accrued 
interest  receivable. 


359.  Credit  Interest,  under  the  proper 
title,— 

h.  For  all  interest  accrued  and  owing  to 
others  on  notes  payable,  *bonds  ac- 
counts, etc.,  at  the  beginning  of  busi- 
ness, which  will  be  debited  to  this 
account  when  paid. 

i.  For  the  use  of  money  (interest)  given 
to  others  on  their  notes  (notes  rec.) 
accounts,  etc.,  and  for  which  they  pay 
or  give  us  credit. 

For  the  use  of  money  (discount)  given 
to  others  on  their  notes  and  acceptances 
that  are  discounted  for  them  by  us. 
For  the  use  of  money  (discount)  gi"en 
to  others,   when  we   prepay  our  own 
notes  (notes  pay.)  in  their   favor. 
For  the  use  of  monej'-  (discount)  given 
to    others    on    notes    and   di'afts   thej'' 
transfer  to  us  before  maturity  .ci'  pur- 
chases or  on  account. 
For  accrued  interest  owing  to  us  at  the 
close  of  the  fiscal  period,  as  sho..n  by 
the  inventory  of  accrued  interest  receiv- 
able (^468a). 

For  accrued  interest  owing  to  others  at 
the  close  of  the  last  preceding  fiscal  period, 
as  shown  by  the  inventory  of  accrued 
interest  payable. 


J- 


k. 


"Interest  on  bonds  is  generally  recorded  in  a  separate  account,  because  it  is  always  shown 
separately  in  the  profit  and  loss  statement.  Interest  on  bonds  should  always  be  accrued 
monthly. 


360.  Observe  that  in  every  instance  the 
account  is  debited  for  the  cost  of  the 
use  of  money  received. 


361.  Observe  that  in  every  instance  the 
account  is  credited  for  the  returns  from 
the  use  of  7noney  given. 


102 


BOOKKEEPING   AND   ACCOUNTANCY 


362.    Transactions  Illustrating  the  Various  Applications  of  the    Rule 
(11356)   FOR  Debiting  and  Crediting  Interest  Accounts. 

Transactions  for  January  affecting  interest  account  are  as  follows : 

Jan.  1.    Interest  accrued  and  owing  to  us  from  others  at  the  beginning  of  busi- 
ness, $9.17.     (^358a) Jan.  1.    Interest  accrued  and  owing  to  others  at  the 

beginning  of  business,  $3.47.     (^359/i) Jan.  5.    Paid  for  interest  on  a  note 

maturing  today,  $3.65.     (•|3586) Jan.  7.    Our  note  was  discounted  at  bank 

at  30  days,  aniount  of  discount,  $2.50.     (1|358c) Jan.  9.    Received  payment 

fornoteinour  favor,  and  also  the  interest  amounting  to  $-1:.  12.      (^359t) Jan. 

10.     A  customer  prepaid    his   note   in    our  favor   less    discount    to    maturity, 

amount  of  discount,  $1.17.     (^358(i) Jan.  12.     As  an  accommodation   we 

discounted  a  friend's  note  for  $250  at  30  days,  amount  of  discount  being  $1.25. 

(^359j) Jan.    14.     We  prepaid  our  note  in  favor  of  B.  A.  Watson  less  dis- 

counttomaturity,  amount  of  discount,  $3.27.     (^359^) Jan.  15.     Hamilton& 

Company  have  transferred  to  us,  on   account,  a  note   in  their  favor  less  dis- 
count to  maturity,  discount  $5.66.     (^359/) Jan.  17.     We  transferred  to 

Mitchell  Sons,  on  account,  note  in  our  favor  less  discount  to  maturity,  the  dis- 
count being  $1.12.     (!i358e) Jan.  31.     An  inventory  of  the  interest  which 

has  accrued  on  our  interest  bearing  notes  in  favor  of  others  shows  that  w^e  owe 

accrued  interest  payable,  $12.44.     (11358/) Jan.  31.     An  inventory  of  the 

accrued  interest  owing  to  us  on  notes  in  our  favor  shows  that  other=  owe  us  acrued 

interest  receivable   amounting  to   $7.66.     (1|359m) Jan.  31.     The  accrued 

interest  owing  to  us  at  the  close  of  the  last  preceding  fiscal  period  for  which  this 

account   was   then   credited   was   $8.94.     {*^,d58g) Jan.   31.     The   accrued 

interest  owing  to  others  at  the  close  of  the  last  preceding  fiscal  period  for  which 
this  account  was  debited  was  $6.56.         (•[359n) 

What  is  the  gain  or  loss  from  interest  for  January?     (1[364) 

exercise 

363.  Prepare  a  ledger  account  for  the  preceding  transactions  like  illustration 
57,  and  present  for  approval. 


Illustration  57. 


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7 


INTEREST  AND  DISCOUNT  ACCOUNTS.  103 

To  Close  Interest  and  Discount  Accounts. 

364.  The  difference  between  the  two  sides  of  an  interest  or  a  discount  account 
shows  the  loss  or  gain — a  loss  when  the  debit  side  is  the  larger,  a  gain  when  the  credit 
side  is  the  larger.  In  either  case  it  should  appear  as  a  separate  item  in  the  profit 
and  loss  statement.     (Illustration  87) 

365.  To  close — After  the  profit  and  loss  statement  has  been  prepared,  interest 
and  discount  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit  and  loss 
statement.  When  the  closing  item  to  any  interest  or  discount  account  has  been 
posted,  which  should  balance  the  account,  rule  the  closing  lines  in  red  ink,  as  shown 
in  illustration  57,  and  enter  the  footings  in  black  ink. 

365a.  The  method  of  disposing  of  inventories  for  accrued  interest  receivable 
and  accrued  interest  payable  is  explained  in  ^468. 

Exercises  in  Interest  and  Discount  Accounts. 

366.  Prepare  ledger  accounts  for  the  following  transactions,  showing  the  ac- 
counts closed  like  illustration  57,  applying  the  rule  (^356)  for  each  transaction. 

(1)  Oct.  1.     Paid  for  interest  on  our  note  due  today  at  bank,  $7.45.      (^3586) 
Oct.  5.     The  bank  discounted  for  us  J.  M.  Robinson's  acceptance  in  our 

favor,  discount  for  30  days,  $4.58.     (1[358c) Oct.  8.     Samuel  Walker  paid 

his  note  in  our  favor  with  interest  due  today;  the  interest  was  $7.50.  (^359i) 
-     -     Oct.  12.     Frank  Brown  paid  his  overdue  account  including  interest;  interest 

for  three  months,  $8.25.     (^359i) Oct.  15.     William   Franklin  transferred 

to  us  J.  N.  Scott's  30-day  note  less  a  discount  of  $2.54.     (^359/) 

What  does  the  difference  of  the  account  show — a  loss  or  a  gain  and  how  much? 

(2)  William  Bond's  transactions  affecting  interest  and  discount  account  for 
the  month  of  April  are  as  follows : 

April  2.  He  paid  interest  on  an  overdue  account  in  favor  of  Johnson  &  Son, 
$3.47. April  5.  James  Richard  prepaid  his  note  in  Bond's  favor  by  agree- 
ment; the  discount  was  $2.50. April  9.     He  transferred  J.  N.Brown's  note 

in  his  favor  to  WiUiam  Walker  on  account,  less  discount,  $1.56. April  16. 

He  received  interest  on  William  Brown's  overdue  account,  $2.45. April  23. 

He  paid  Jiis  note  in  favor  of  R.  N.  Bates,  less  a  discount  of  $2.50.  (T[359A;)  -  - 
April  30.  He  owed  interest  to  others,  which  has  accrued  to  date,  on  notes  and 
open  accounts,  $12.45.     (^358/). 

What  is  the  result  shown  by  his  interest  and  discount  account? 


104  BOOKKEEPING   AND    ACCOUNTANCY 

(3)  E.  D.  Vane  &  Company's  transactions  affecting  interest  and  discount 
account  for  the  year  are  as  follows: 

Jan.  1.  The  accrued  interest  owing  to  them  at  the  close  of  the  last  preceding 
fiscal  period  (December  31),  as  shown  by  the  inventory  of  accrued  interest  receiv- 
able, was  $215.12.     (^358g) They  owed  interest  to  others  at  the  close  of 

the  last  fiscal  period  (December  31),  as  showai  by  the  inventory  of  accrued  inteiest 

payable,  $14.65.     (•{3597?) Feb.  5.     They  paid  for  the  use  of  money  borrowed 

on  their  notes,  S341.90.     (•ISSSb) March  31.     They  gave  the  use  of  money 

to  their  various  customers  on  their  notes  and  acceptances  which  they  discounted, 

to  the  value  of  $74.12.     (l|359j) April  30.     The  discount  on  notes  and  drafts 

v.-hich  they  transferred  to  others  before  maturity  amounted  to  $18.25.     (^ooSe) 

May  31.     During  the  month  they  discounted  for  others  various  notes  and 

acceptances,  the  discount  on  which  amounted  to  $47.76.     (^359j) June  30. 

They  prepaid  during  the  month  three  of  their  oavti  notes,  thereby  saving  a  discount 
of  $67.77.  (^359A-)  -  -  July  31.  During  the  month  two  customers  prepaid 
their  notes,  less  discount  to  maturity;  the  amount  of  the  discount  was  $18.50. 

(^358d) Aug.  31.     During  the  month  they  had  various  notes,  acceptances 

and  time  drafts  discounted  at  bank,  the  discounts  amounting  to  $33.71.  (^358c) 
-  -  Sept.  30.  The  notes  and  acceptances  of  various  customers  were  transferred 
to  them  before  maturity  for  purchases  and  to  apply  on  account;  the  discounts 

amounted  to  $84.76.     {^3591) Dec.  31.     At  the  close  of  the  year  they  find 

they  owe  on  accrued  interest  payable,  $345.75  (^358/)  and  that  others  owe  tliem 
on  accrued  interest  receivable,   $427.27     (^359»i)- 

What  result  is  showai  by  the  interest  and  discount  account  at  the  closing  of  the 
books? 

Arithmetical  Problems — Interest  Accounts. 

Dm-ing  the  month  of  November,  C.  F.  Scharfe  received  and  paid  interest  as 
follows : 

Interest  on  his  notes  receivable  paid  in  cash,  $25.75;  discount  on  notes  and 
acceptances  discounted  for  others,  $97.42;  discount  on  his  notes  that  were  dis- 
counted for  him  by  others,  $3.50;  interest  received  on  money  loaned  to  others, 
$84.50. 

What  were  his  net  returns  from  interest? 


PROPERTY  INVESTMENT  EXPENSE  AND  INCOME  ACCOUNTS. 

367.  In  connection  with  almost  every  business  there  is  an  investment  of  some 
part  of  the  capital  in  various  forms  of  property,  such  as  real  estate,  furniture,  fi.K- 
tures,  horses,  wagons,  harness,  machinery,  tools,  patterns,  patent  rights,  etc.,  that 


INVESTMENT    EXPENSE   AND    INCOME    ACCOUNTS  105 

are  not  included  in  and  form  no  part  of  the  special  line  of  goods  bought,  sold  or  manu- 
factured, but  which  are  necessary  in  carrying  on  the  business.  The  accounts  show- 
ing these  investments  are  known  as  capital  invesiment  accounts.  They  show  the 
amount  of  the  capital  of  the  concern  invested  in  various  kinds  of  property  that  is 
not  immediately  available  for  the  payment  of  current  debts  or  expenses. 

368.  Capital  investment  accounts  should  show  only  the  cost  value  of  the  property 
represented  in  the  account.  Whenever  anything  is  sold  that  has  been  charged  to  an 
investment  account,  an  entry  should  be  made  which  will  credit  the  account  for  tlie 
original  cost  price  of  what  is  sold,  the  object  being  to  have  the  account  show  at  all 
times  the  original  cost  price  of  tlte  property  on  hand.  If  the  selling  price  is  greater  than 
the  original  cost,  the  difference  or  gain  should  be  credited,  directly  to  profit  and  loss 
account  or  it  may  be  credited  to  a  special  account  under  a  title  that  will  indicate  the 
source  of  the  income.  If  the  selling  price  is  less  than  the  original  cost  price,  the 
difference  should  be  debited  to  profit  and  loss  account,  unless  a  depreciation  or  other 
reserve  fund  has  been  set  apart  to  meet  the  loss,  when  the  account  for  that  fund 
should  be  debited.  Losses  and  gains  from  capital  investment  accounts  should  ap- 
pear as  separate  items  in  the  profit  and  loss  statement. 

369.  In  addition  to  the  investment  in  properties  shovm  by  the  investment 
accounts,  various  expenses  are  incurred  in  their  maintenance  and  from  many  of  them 
an  income  is  returned;  consequently  a  separate  expense  and  income  account  should 
be  kept  with  each  investment,  to  show  the  cost  of  maintenance,  expenses,  etc.,  on 
one  side  and  the  income  or  returns  from  the  investment  on  the  other. 

370.  Expense  and  income  accounts  relating  to  investments  should  show  only 
the  gain  or  loss  arising  from  the  current  use  or  employment  of  the  property'-.  Any  gain 
or  loss  arising  from  an  increase  or  decrease  in  the  value  of  the  property  affects  the 
investment  account  and  should  be  disposed  of  as  described  in  ^368. 

371.  Observe,  therefore,  that  there  are  generally  two  accownte  opened  in  connec- 
tion with  the  ownership  of  property — one  showing  the  investtncnt  in  the  property  and 
the  other  showing  the  expenses  of  the  property  and  the  income  from  the  property 
and,  consequently,  the  gain  or  loss  resulting  from  the  investment. 

372.  It  is  sometimes  difficult  to  determine  whether  items  representing  outlays 
affecting  these  accounts  should  l)e  charged  to  the  investment  or  to  the  expense  and 
income  account.     The  following  are  the  rules  usually  observed  by  accountants: 

'  (a)  All  expenditures  made  on  the  property,  whether  for  first  cost  or  for  improve- 
ment s,  up  to  the  tim^  the  property  is  ready  for  use  or  becomes  productive  should  be 
charged  to  the  investment  account 


106  BOOKKEEPING   AND    ACCOUNTANCY 

(6)  All  sums  expended  on  the  property  which  increase  the  selling  or  rental 
value  of  the  property  should  be  charged  to  the  investmefit  account. 

(c)  All  sums  expended  to  maintain  the  property  at  its  present  cost,  seUing  or 
rental  value  should  be  charged  to  the  expense  and  income  account. 

373.  As  the  method  is  the  same  for  keeping  the  various  investment  expense  and 
income  accounts,  only  those  for  real  estate  will  be  explained  and  illustrated  in  detail. 
Briefer  explanations  of  other  similar  accounts  will  follow. 

REAL  ESTATE. 

374.  This  is  a  general  name  that  is  applied  to  what  is  known  as  real  property 
which  consists  of  land,  houses,  etc.  Accounts  with  each  property  should  be  kept 
under  appropriate  headings,  as  "House  and  lot,  96  North  St.,"  or  "18th  Street 
Store  Property,"  or  "Elm  Township  Farm,"  with  separate  accounts  for  the  invest- 
ment and  for  the  expenses  and  incomes. 

375.  Not  infrequently  there  is  a  considerable  variation  in  the  increase  or  de- 
crease of  the  value  of  land  and  the  buildings  thereon.  Usually  there  is  a  gradual 
depreciation  in  buildings  while  there  is  a  gradual  increase  in  the  value  of  land.  The 
decrease  in  the  value  of  the  buildings  should  be  taken  account  of  annually,  which  would 
directly  affect  the  current  gains  and  losses  of  the  business  for  the  period,  while  the 
increase  in  the  value  of  the  land  is  seldom  considered  until  the  land  is  finally  disposed 
of.  For  these  reasons  it  is  not  unusualthat  two  accounts  are  kept — one  with  the  land, 
under  the  title  of  "  Real  Estate,"  and  the  other  with  the  structures  or  other  property 
thereon,  under  the  title  of  "Buildings." 

THE   INVESTMENT  ACCOUNT— REAL  ESTATE 
A  capital  Investment  Account  Showing  a  Resource. 

376.  Real  estate  investment  accoimts  should  be  opened  under  appropriate 
headings  followed  by  the  word  "Investment,"  as,  "Real  Estate  Investment,"  or 
where  separate  accounts  with  each  property  are  kept,  "House  and  Lot  96  North 
St., — Investment."    Such  accounts  are  purely  resource  (asset)  accounts. 

377.  The  object  is  to  show  the  cost  of  the  investment,  which  includes  (a)  the 
first  cost  of  the  land  or  property  purchased  including  the  buildings  or  other  improve- 
ments thereon,  also  the  cost  of  surveying,  examination  of  title,  recording  fees,  com- 
missions etc.,  (&)  cost  of  all  permanent  improvements  which  result  in  increasing  the 
earning  or  rental  value  of  the  property,  such  as  repairs,  grading,  side-walks,  sewers, 
etc.  and  (c)  cost  of  taxes,  interest  on  mortages,  or  other  items  of  cost  up  to  the  time 
the  property  becomes  productive  or  is  ready  for  use. 


INVESTMENT  ACCOUNTS 


107 


Rule  for  Debiting  and  Crediting  Real  Estate  Investment  Accounts. 
378.  Debit  real  estate  investment  accounts  for  costs:  credit  for  returns. 


378a.    Debit  real  estate  investment  accounts 
for  costs. 


3786.  Credit  real  estate  investnaent  accounts 
at  the  cost  price  of  the  property  sold  or 
otherwise    disposed    of.      (Read   note.) 


379.    The  various  applications  of  the  rale  are  as  follows: 


380.  Debit  the  investment  account,  under 
its  appropriate  title, — • 

a.     For  the  cost  or  appraised  value  of  the 
'       property  on  hand  at  the  beginning  of 
business. 

6.  For  all  purchases  of  property,  and  for 
all  additional  costs  to  the  property  and 
improvements  until  it  is  ready  for  use 
or  occupancy  or  becomes  productive. 

c.  For  all  permanent  improvements  made 
thereafter  that  will  increase  the  perma- 
nent value  of  the  property  or  the  rental 
or    other    income   from    the    investment. 

d.*  For  commissions  on  purchases  of  the 
property. 

382.  Observe  that  in  every  instance  the  ac- 
count is  debited  for  the  cost  of  the  prop- 
erty represented  by  the  total  invest- 
ment. 


381.  Credit  the  investment  account,  under 
its  appropriate  title, — 

e.  For  all  sales  of  the  property  at  its  cost 
value,  i.  e.,  for  the  original  price  charged 
to  the  account. 

Note  :  The  returns  or  incomes  from  the 
property  are  shown  in  the  expense  and  in- 
come account. 

*Commission  on  sales  represents  the  cost 
of  a  particular  service  rendered  for  which  it 
is  the  best  practice  to  keep  a  separate  com- 
mission account  to  which  all  such  items 
should  be  debited. 


383.  Observe  that  in  every  instance  the  ac- 
count is  credited  for  the  original  cost 
price  of  the  property  disposed  of. 


384.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 
(^378)   for  Debiting  and  Crediting  Real  Estate  Investment  Accounis. 

(1)     Illustrating  the  transactions  and  the  account  for  property  purchased  to 
be  used  in  connection  with  the  business,  i.  e.,  in  which  the  business  is  located. 

Jan.  1.     Purchased  property  located  at  No.  9  W.  Main  St.,  consisting  of  a 

store  building  and  two  lots,  $11,500.     (*I380&) Jan.  5.     Paid  for  permanent 

improvements  on  the  property  by  enlarging  rear  entrance  and  building  shipping 

platform,  $450.     (1[380c) Jan.  6.     Paid  for  surveying,  examination  of  title, 

and  recording  deed,  etc.,  $63.75.     (^377a,  3806) Jan.  12.     Paid  purchasing 

agent's  commission  (f%)  $86.25.     (^380(0 Jan.  25.     Sold  unoccupied  lot 

adjoining  the  lot  on  which  the  building  is  situated  for  $3600,  the  cost  value  of  which 
was  $3000,  the  profit,  $600,  being  retained  by  the  proprietor.     ( 1(381  e) 

What  is  the  cost  value  of  the  property   on   hand  at  the  close  of  the  fiscal 
period,  January  31?     (11385) 


108 


BOOKKEEPIXG    AND    ACCOUNTANCY 


Prepare  a  ledger  account  like  the  following  illustration. 

Illustration  5S 


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To  Close  Real  Estate  Investment  Accounts. 

385.  The  difference  l)et\veen  the  two  sides  of  a  real  estate  investment  account 
shows  the  original  cost  value  of  the  property  on  hand,  which  is  a  resource  (asset) 
that  should  appear  as  an  item  in  the  statement  of  resources  and  liabilities. 
(Illustration  93.) 

386.  To  close.  A  real  estate  investment  account  is  not  usually  closed  unless 
it  is  desired  to  show  the  value  of  the  investment  in  one  item  or  to  forward  the 
account  to  another  page,  when  the  difference  should  be  entered  as  a  balance  on  the 
credit  side  of  the  account  in  red  ink,  after  which  the  account  should  be  ruled  in 
red  ink  and  footed  in  black  ink,  when  the  balance  should  be  brought  down  on 
the  opposite  side  in  black  ink  as  shown  in  illustration  58  or  forwarded  to  the 
opposite  side  of  the  account  on  a  new  page.  When  the  property  represented  in  the 
account  is  finally  disposed  of,  the  account  will  balance. 

REAL  ESTATE  EXPENSE  AND   INCOME  ACCOUNTS. 

387.  Real  Estate  Expense  and  Income,  is  an  appropriate  heading  when  a  single 
account  is  kept  for  one  or  more  properties.  If  separate  accounts  are  kept  with  each 
propert}^  they  maj^  be  designated  by  the  location  of  the  property,  such  as  "Real 
Estate,  96  North  St. — Expense  and  Income,"  or  "House  and  Lot,  26  Elm  St.- 
Expense  and  Income."  Separate  accounts  with  expenses  and  with  incomes  may  be 
kept  if  desired.  In  many  instances  this  plan  is  preferable.  A  real  estate  expense 
and  income  account  is  a  purely  profit  and  loss  account  and  in  no  way  affects  the 
results  shown  by  the  investment  account. 

388.  The  object  is  to  show  the  current  expenses  of  the  property  after  it  has 
been  prepared  for  occupancy  or  use,  such  as  expenditures  for  preservation,  taxes, 
insurance,  repairs,  commissions  for  renting,  interest  on  mortgages,  light,  heat,  jan- 
itor service,  depreciation,  etc.,  on  the  one  side,  and  the  gross  income  from  rentals 
or  other  sources  on  the  other  side,  and  from  these  to  ascertain  the  amount  gained  or 
lost  on  the  investment.  It  is  from  this  account  that  the  owner  is  enabled  to  calcu- 
late the  percentage  of  profit  (or  loss)  on  the  investment. 


EXPENSE  AND  INCOME  ACCOUNTS 


109 


Rule  for  Debiting  and  Crediting  Real  Estate  Expense  and  Income 

Accounts. 

389.  Debit  real  estate  expense  and  income  accounts  for  costs:  credit  for  returns. 

390.  The  various  applications  of  the  rule  are  as  follows: 


391.  Debit  the  expense  and  income  ac- 
count under  its  appropriate  title. — • 

a.  For  the  cost  of  repairs,  preservation,  or 
other  improvements  to  maintain  the 
property  in  good  condition  when  such 
improvements  do  not  increase  its  rental 
value. 

b.  For  taxes,  insurance,  interest,  and  other 
similar  charges  on  the  property  for  the 
fiscal  period. 

c.  For  the  cost  of  light,  heat,  janitor  ser- 
vice, etc.,  when  payment  for  the  same  is 
included  in   the  income   from   rentals. 

d.  For  agents'  commissions  for  renting, 
collecting  rent,  etc. 


392.  Credit  the  expense  and  income  ac- 
count under  its  appropriate  title, — 

e.  For  all  returns  in  the  way  of  rents,  sales 
of  products  or  other  incomes  from  the 
property. 

/.  In  the  case  of  farms  or  other  property 
operated  by  the  owner,  for  the  sale  of  all 
products,  andfor  the  value  of  all  products 
taken  for  private  use  at  market  price. 

Note:  Property  used  by  the  owner  as 
a  residence  or  place  of  business  is  seldom 
credited  for  any  income  value,  although 
when  used  as  a  place  of  business,  it  is  not 
unusual  to  consider  its  rental  value  as  an 
income  which,  when  credited,  should  be 
debited  to  the  proper  expense  account. 


393.  Observe  that  in  every  instance  the  ac- 
count is  debited  for  the  cost  of  some 
outlay  which  is  an  expense  to  the  prop- 
erty. 


394.  Observe  that  in  every  instance  the  ac- 
count is  credited  for  the  returns  from 
some  income  from  the  property. 


395.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 

(1f389)    FOR    Debiting    and    Crediting    Real    Estate 

Expense  and  Income  Accounts. 

(1)     Example  illustrating  the  transactions  and  the  account  for  property  in 
which  the  business  of  the  owner  is  conducted. 


Jan.  16.    Paid  for  repairs  to  the  roof,  $16.50. Jan.  25.     Paid  for  replacing 

broken  glass  in  windows,  $2.56. Jan.  31.     The  monthly  proportion  of  taxes 

paid  is  $3.50;  the  monthly  proportion  of  insurance  is  $8.50. 


What  is  the  net  cost  of  the  expenses  on  real  estate  for  the  month? 


no 


BOOKKEEPING    AND    ACCOUNTANCY 


Prepare  a  ledger  account  like  the  following  illustration. 


Il  LUSTRATION    59. 


J&^J^  £j2^,ii^?^   ok;^<^^?^.^^^K=.^^^^^^^;^7^?<t-^^ 


To  Close  Real  Estate  Expense  and  Income  Accounts 


396.  The  total  footing  of  the  debit  side  of  a  real  estate  expense  and  income 
account  shows  the  total  expense  of  the  property  for  the  period;  the  total  credit  foot- 
ing shows  the  total  income  from  the  property  for  the  period.  The  difference  between 
the  two  sides  of  the  account  shows  the  net  gain  or  the  net  loss  on  the  investment — a 
loss  when  the  debit  side  is  the  larger,  a  gain  when  the  credit  side  is  the  larger, — 
which  should  appear  as  a  separate  item  in  the  profit  and  loss  statement.  When  it 
is  desired  to  show  the  total  expenses  and  the  total  income,  the  footings  may  be  in- 
serted to  the  left  of  the  amount  columns  in  the  profit  and  loss  statement,  extending 
the  difference  into  the  proper  column. 

397.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  real 
estate  and  income  accounts  are  closed  by  a  journal  entry  made  up  from  the  profit 
and  loss  statement.  When  the  closing  item  has  been  posted,  which  should  balance 
the  account,  rule  the  closing  lines  in  red  ink  as  shown  in  illustration  59,  and  enter 
the  footings  in  black  ink. 

397a.  Resource  and  liability  inventories  affecting  this  account  are  explained 
in  1[468. 

398.  Illustrating  the  rules  under  T[378  and  11389,  if  the  improvements  mentioned 
in  113806  do  not  increase  the  earning  or  rental  value  of  the  property,  their  cost  should 
be  charged  to  the  expense  account;  and  likewise  if  the  items  mentioned  in  1|380c  do 
not  increase  the  rental  value.ihey  should  be  charged  to  the  expense  account  if  thej^are 
created  after  the  property  becomes  productive  or  is  ready  for  use. 

399.  Where  an  improvement  does  not  increase  the  rental  value  or  income  but 
does  increase  the  permane/?^  or  selling  value  of  the  property  it  is  the  rule  to  charge 
the  cost  to  the  investment  account,  but  a  sharp  distinction  must  be  made  between  what 
constitutes  a  material  increase  in  the  permanent  or  selHng  value  and  that  which  is 
merely  an  expense. 

400.  A  single  real  estate  expense  and  income  account  may  be  kept  to  include 
the  expenses  of  and  returns  from  a  number  of  properties  when  it  is  not  deemed  neces- 


CLOSING    EXPENSE   AND    INCOME   ACCOUNTS  111 

sary  to  keep  a  separate  expense  and  income  account  for  each  property.  Such  an  ac- 
count would  show  the  total  expenses  of  all  the  real  estate  included  and  the  total 
income  from  the  same,  the  difference  being  the  net  'profit  or  the  net  loss  on  the  invest- 
ments for  the  period  covered  in  the  account. 

401.  When  such  an  account  is  kept,  the  expenses  and  incomes  relating  to  each 
property  included  may  be  separated  on  an  analysis  sheet  at  the  end  of  the  fisca. 
period.  This  method  has  the  advantage  of  reducing  the  number  of  accounts  in  the 
ledger. 

402.     Exercises  in  Real  Estate  Investment,  Expense  and  Income  Accounts. 

The  following  transactions  involve  both  investment  and  expense  and  income 
accounts.  Prepare  ledger  specifications  for  each,  applying  the  rules  (^378,  11389) 
in  determining  the  proper  debits  and  credits.  When  completed,  present  for  ap- 
proval. 

(1)  April  5.  Frank  P.  Kennedy  purchased  a  lot  on  the  corner  of  High 
and  Chestnut  Sts.  for  $1000.  (^3806)  -  -  June  30.  Paid  for  surveying,  $7.50 
f^377a);  recording  deed,  $1.50;  excavating  foundation  for  buildmg,  $175;  con- 
tract for  material  and  labor  for  brick  w^ork,  $3216.94;  material  and  labor  of 
carpenters,  $1875.62;  tiled  floors,  $750;  plumbing,  $397.15;  roofing,  $307.80;  grad- 
ing yard,  $65;  cementing  cellar,  $54.50;  constructing  sidewalks,  $87.60;  preparing 

lawn  and  sowing  grass  seed,  $6. April  12.     He  received  for  the  sale  of  old 

building  on  lot  at  time  of  purchase,  $65  (^381e).  The  building  was  ready  for 
occupancy  July  1.     During  the  first  year  he  received  rental,  $2000,  (![392e)  entered 

under  date  of  June  30.     His  expenses  were:   Mar.  5,  taxes,  $187.60;   (113916) 

April  1,  insurance,  $150;  May  15,  water  rent,  $60;  sundry  repairs  on  build- 
ing, $18.36;  assessment  for  street  cleaning,  $18.54;  June  30,  upkeep  of  lawn, 
$30;    electric  lighting,  $120;    (11391c)  coal  and  gas,  $237.50. 

What  was  the  cost  value  of  the  property  on  hand  (1[385)  and  what  was  the  net 
income  from  the  property  for  the  year  ending  June  30?     (1[396) 

(2)  Jan.  1.  John  F.  Richards  purchased  the  Mann  building  for  $15,000,  giv- 
ing in  payment  cash,  $10,000,  and  a  mortgage  for  $5000,  bearing  interest  at  6%. 

-  -     Feb.  1.     Received  cash  for  rent,  $300. Feb.  5.     Paid  for  insurance 

(1  year)  $160.  -  -  March  1.  Received  rent,  $320.  -  March  2.  Paid 
janitor's  salary  for  January  and  February,  $75.  -  -  March  4.  Assessment  for 
grading  and  curbing,  $42.13. March  8.  Paid  carpenter  for  changing  parti- 
tion, $20,  for  which  the  tenant  agrees  to  pay  $5  more  rent  permonth.     (1[380c) 

-  -     March  15.     Water  rent  (3  months)  $35. March  20.     Putting  new 

locks,  keys,  etc.,  on  doors,  $8.75. March  31.    Rental  for  March,  $350;  elevator 

repairs,  $85.20;  janitor's  salary  for  March,  $37.50;  electric  light  bill  for  3  months 
per  contract,  $30;  new  letters  for  directory,  $3.50;  asbestolith  flooring  for  halls, 
$216.30. 

Show  the  investment  and  the  expense  and  income  accounts  for  the  quarter 
ending  March  31. 


112  bookkekpinq  and  accountancy 

Arithmetical  Problems — Real  Estate  Accounts. 

(1)  Jan.  1.  The  West  Side  Stock  Yards  Company  began  the  construction  of 
their  new  yards.  The  different  construction  charges  were  as  follows:  grading  yard, 
$476.18;  iron  pipe,  brick  work,  miscellaneous  material  for  underground  construc- 
tion, $2617.80;  lumber  and  labor  for  overhead  construction,  $3291.70;  office  build- 
ing, per  contract,  $1697.30;  fixtures  in  office  building,  $275;  plumbing  in  office 
building,  $36.40;  insurance  premiums  expired  during  construction,  $76.50:  rent  of 
ground  from  B.  &  O.  Railroad  during  construction,  $275;  interest  on  bank  loan 
during  construction,  $60;  office  expenses — telephone,  telegrams,  stationery,  postage, 

etc.,  during  construction,  $86.45. Feb.   1.     The  building  and  yards  were 

rented  to  the  West  Side  Commission  Company,  and  the  construction  company's 
expenses  were  as  follows:  feed  purchased,  $187.30;  repairing  broken  gates,  $86.45; 
lumber  and  material  for  building  additional  yards,  $376.18;  plumbing  for  addi- 
tionalyards,  $127.30;  new  insurance  taken,  $36;  taxes,  $54.35.  They  received  for  feed 
sold,  $153.19;  for  rent,  $460;  for  insurance,  $49.60;  and  other  miscellaneous  in- 
come, $126.37. 

What  was  the  cost  of  the  stock  yard;  also  the  total  expense,  the  total  income 
and  the  net  gain  or  loss? 

(2)  July  1.  The  buildings,  land  and  all  improvements  of  the  Granville  Glass 
Company  were  purchased  at  receivers'  sale  for  $6500.  The  necessary  expenditures 
by  the  purchaser  in  order  to  put  the  plant  in  running  condition  were  as  follows: 
fire  brick,  $1487.96;  tank  blocks,  $986.14;  lumber,  $784.32;  miscellaneous  hardware 
and  other  material,  $396.45;  labor  during  construction,  $2165.70;  superintendence, 
$600;  gas  and  other  fuel  used  during  reconstruction  period,  $1100;  iron  pipe,  $270. 

-    -    Sept.  1.     The  plant  started  to  make  glass  at  its  full  capacity-. Other 

charges  since  Sept.  1  have  been,  for  miscellaneous  hardware,  $143.16;  repairing  roof 
of  building,  $28.16;  blacksmith  shop  expenses  (repairing  tools,  etc.), $295.60;  tank 
blocks,  $487.16;  fire  brick,  $232.12;  replacing  old  cutters'  tables,  $300;  sold  old 
tables  for  $60. 

What  is  the  total  cost  of  the  plant  and  of  maintenance? 

403.  The  real  estate  investment,  erpense  and  income  accounts  described  in  the 
preceding  pages,  beginning  Avith  1|387,  represent  these  accounts  as  they  are  kept 
in  the  books  of  the  owner,  and  must  not  be  confused  with  the  accounts  that  would  be 
kept  by  a  real  estate  agent,  although  the  principles  involved  are  quite  similar.  The 
real  estate  accounts  of  agents,  trustees,  administrators,  etc.,  will  be  fully  explained 
in  a  later  chapter. 

FURNITURE  AND  FIXTURES. 

404.  Under  this  heading  is  kept  an  account  with,  furniture,  such  as  desks,  tables, 
chairs,  or  other  articles  that  may  be  used  in  the  furnishing  of  a  store,  dwelling, 
factory,  or  any  place  of  residence  or  business,  and  with  fixtures,  which  include  such 
articles  as  gas  fixtures,  shelving,  counters,  show  cases,  electric  fans,  filing  cases, 
typewriters,  office  safes,  etc. 


FURNITURE   AND    FIXTURES  113 

405.  Two  accounts  are  usually  kept — one  showing  the  capital  in  estment,  and 
the  other  showing  the  cost  of  repairs  and  renewals. 

406.  The  investment  account  is  kept  for  the  purpose  of  showing  the  original  cost 
of  the  furniture  and  fixtures.  The  original  cost  is  neither  increased  nor  decreased 
while  the  articles  remain  in  use,  so  that  in  case  of  fire  or  for  any  other  reason  the  booka 
will  show  the  original  cost  of  whatever  was  destroyed.  When  anything  charged  to 
this  account  is  disposed  of  the  account  is  credited,  not  for  the  selling  price  but  for 
the  original  cost  price  debited  to  the  account.  The  account  will  therefore  always 
show  a  resource  (asset)  for  the  difference,  which  is  the  original  cost  value  of  the  articles 
on  hand. 

407.  When  furniture  and  fixtures  have  depreciated  through  use,  the  deprecia- 
tion is  not  shown  in  the  investment  account  but  should  be  charged  to  a  "Reserve 
for  Depreciation"  account  which  is  explained  in  ^557;  or  if  this  account  is  not 
kept,  it  should  be  charged  to  the  general  expense  acooaiit  cr  directly  to  profit  and 
loss  account. 

Rule  for  Debiting  and  Crediting  Fv/uniture  and  Fixture 
Investment  Accounts. 

408.  Debit  furniture  and  fixture  i)ivtisiment  accounts  for  costs:  credit  for  returns. 

409.  The  various  applications  of  tbe  rule  are  as  follows: 

410.     Debit  the  investment  accomit   uuaei-  411.     Credit  the  investment  account,  under 

its  appropriate  title,—  its  appropriate  title,— 

a.  For  the  value  of  the  property  on  lianci  c.    '  For  all  sales  of  furniture  and  fixtures  at 
at  the  beginning  of  business.  their  original  cost  value  i.  e.,  for  the  ori- 

b.  For  all  purchases  of  furniture  and  fix-  ginal  price  charged  to  the  account. 
tures,  including  all  charges  for  dtiiver- 

ing,  installing,  etc.,  until   the  same   is 
ready  for  use. 

412.     Observe  that  in  every  instance  the  ac-  413.     Observethatinevery  instance  the  ac- 

count is  debited  for  the  cost  of  the  fur-  count  is  credited  for  the  returns  from  the 

niture  and  fixtures  purchased.  property  disposed  of  at  the  original  cost 

price. 

414.  Transactions  Illustra^^ing  the  Various  Applications  of  the  Rule 
(1408)  FOR  Debiting  aND  Crediting  Furniture  and  Fixtures,  Invest- 
ment Account. 

(1)  Jan.  1  The  following  furniture  and  fixtures  were  purchased :  1  double 
mahogany  desk,  $82.50  (114106);  1  single  desk,  $45;  3  chairs,  $17.50;  1  typewriter, 


114 


BOOKKEEPING   AND   ACCOUNTANCY 


$75;  1  filing  case,  $12.50;  1  copy  press,  $5;  1  typewriter  table,  $7.50;  1  rug  for  office, 
$20;  1  telephone  booth,  $7.50.  -  -  Jan.  15.  1  safe,  $125.  -  -Jan.  31.  The 
copy  press   being  found  unsuitable,  it  was  disposed  of  at  cost  price,  $5.     (1[411c) 

Prepare  an  account  showing  the  original  cost  value  of  the  furniture  and  fixtures 
on  hand,  with  the  balance  brought  do\ra  to  begin  the  account  for  the  next  fiscal 
period.     (^415) 

Illustration  60. 


^^:^:C€^cAy^.^y(^t(ytylsy  >^c:^^-<z:-^^^-^<i/ 


\' 


/^gz^e-y2-<-g-^ 


JfA.€<^ 


^-^rlfv. 


415.  The  difference  between  the  two  sides  of  furniture  and  fixtures  account 
shows  the  original  cost  value  of  the  furniture  and  fixtures  on  hand  which  is  a  resource 
that  should  appear  as  an  item  in  the  statement  for  resources  and  liabilities. 

416.  To  close.  Follow  instructions,  "To  Close  Real  Estate  Investment  Ac- 
counts," ^386. 

REPAIRS  AND  RENEWALS  ACCOUNT. 


417.  Furniture  and  fixtures  repairs  and  renewals  is  a  companion  account  of 
the  furniture  and  fixtures  investment  account  and  in  some  respects  closely  resembles 
a  real  estate  expense  and  income  account,  except  that  it  seldom  shows  credit  items 
inasmuch  as  there  is  usually  no  direct  income  from  this  kind  of  property. 

417a.  It  is  seldom  necessary  to  carry  this  sort  of  an  account  as  these  items 
can  be  charged  directly  to  general  expense  account,  wnich  is  advisable  under  ordi- 
nary circumstances.  A  separate  repairs  and  renewals  account  should  be  kept 
only  in  case  the  items  are  of  sufficient  number  and  importance  to  justify  it. 

418.  The  purpose  of  this  account  may  be  extended  under  the  heading  "Re- 
pairs and  Renewals,"  to  include  not  only  the  cost  of  repairs  and  renewals  of  furniture 


REPAIRS   AND    RENEWALS  115 

and  fixtures,  but  also  similar  costs  for  buildings  and  machinery,  warehouse  tools  and 
appliances,  delivery  equipment,  or  any  other  outlays  for  the  maintenance  or  repairs 
of  property  used  in  carrying  on  the  business,  when  other  accounts  for  that  purpose 
are  not  kept. 

419.  Repairs  and  renewals  is  always  a  profit  and  loss  account  and  in  a  trad- 
ing business  should  appear  as  a  separate  item  in  the  profit  and  loss  statement.  In 
a  manufactiu-ing  business  separate  repairs  and  renewals  accounts  should  be  kept — 
one  for  furniture  and  fixtures,  which  should  appear  as  a  separate  item  in  the  profit 
and  loss  statement,  and  another  for  buildings,  machinery,  tools  appliances,  and  other 
property  constituting  the  "plant"  used  in  the  manufacturing  department,  which 
should  appear  in  the  manufacturing  section  of  the  profit  and  loss  statement  as 
will  be  explained  in  the  chapter  on  manufacturing  accounts  in  this  work. . 

419a.  When  a  "reserve  for  repairs  and  renewals"  account  is  set  up  to  meet 
the  cost  of  repairing  or  renewing  property  of  any  department  of  the  business,  the 
total  cost  of  such  repairs  and  renewals  as  sho'uai  by  repairs  and  renewals  account 
may  be  debited,  at  the  close  of  the  fiscal  period,  to  the  reserve  account,  which  is 
fully  described  in  T[  557a. 

Rule  for  Debiting  and  Crediting  Repair  and  Renewal  Accounts. 

420.  Debit  repair  and  renewal  accounts  for  costs:  credit  for  returns. 

421.  The  various  applications  of  the  rule  are  as  follows: 

422,     Debit  repairs  and  renewals  account,  423,     Credit  repairs  and  renewals  accoun 

under  its  proper  heading, —  under  its  proper  heading, — 

a.      For  the  costs  of  repairs  and  renewals  c.      For   any   returns   from    items   charged 

of    furniture    and    fixtures,    and   also  to  the  account. 

warehouse,  delivery,  office  and  other 

equipments,  unless  separate  accounts 

are  kept  for  these  outlays. 
6.      For  the  cost  of  repairs  and  renewals 

of  buildings,  machinery,  tools,  and  all 

other   equipment    of    the    plant    in    a 

manufacturing  business. 

424.  Transactions  Illustrating  the  Various  Applications  op  the  Rule 
(TI420)  FOR  Debiting  and  Crediting  Repair  and  Renewal 
Accounts. 

Jan.  5.     Paid  for  repairing  two  old  chairs,  Jp2.     (^422a) Jan.  19.     Paid 

for  revarnishing  desk,   $5. Jan.   12.     Paid  for  repairing  desk  drawer,   $1. 

Jan.  26.     Paid   for    repairing   typewriter,    $7.50. Jan.  29.     Paid    for 

repainting  sign,  $4.50. 


116 


BOOKKEEPING   AND   ACCOUNTANCY 


Prepare  an  account  showing  the  cost  of  repairs  and  renewals  of  furniture  and 
fixtures  for  the  month,  as  shown  in  the  following  illustration.     (^425) 


Illustration  61. 


_C^^:;^^^^;Z^i-^;;i^/^^ 


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s 

^^^    i-    cA.<Xyi^ 

2- 

__ 

^imy 

J/  /^<»ia-h/^%,-t; Ji^ 

zo 

'0 

^Z^^-a^i'it.^At^u^  eiAi^ 

^ 

^ 

/z 

/S;&^<£e.iAyc^4<it^^ 

/ 

1 

2& 

/Z^&^.-^^tj^^**/'^-^.^^^- 

_..^. 

^c 

^f 

/Si^iZ^  .^-c-fO^ot^ 

^ 

so" 

..^ 

-=^^ 

_.,._ 

■  1 
-— '                         '      — 

^0 

— -- 

425.  The  difference  between  the  two  sides  of  a  "repairs  and  renewals"  account 
shows  the  cost  of  repairs  and  renewals  for  the  period,  which  is  a  los&  that  should 
appear  as  an  itein  (or  items)  in  the  profit  and  loss  statement. 

426.  To  close.  Follow  instructions  for  closing  real  estate  expense  and 
income  accounts.     (1[397) 

Exercises  in  Furniture  and  Fixtures  Investment  and  Repair 
AND  Rene^val  Accounts. 


427.  The  following  transactions  involve  both  investment  and  repair  and  re- 
newal accounts.  Prepare  ledger  accounts  for  each,  applying  the  rules  (1[408,  ^420) 
in  determining  the  proper  debits  and  credits,  and  present  for  approval. 

(1)  Frank  T.  Rich,  at  the  opening  of  his  business  January  1,  had  furniture  and 
fixtures  on  hand  valued  at  $287.20.  (11410a)  -  -  Jan.  15.  He  purchased  one 
single  desk,  $50;  freight  on  the  same,  $2.35;  drayage  from  depot  to  oflice,    50c. 

-  -  Feb.  12.     He  paid  for  one  rug  for  office  use,  $23.75;  two  chairs,  $17.50;  one 
typewriter  desk,  $24;  filing  case,  $30;  hat  rack,  $6.50.     -  -  Feb.  15.     He  paid  for 

revarnishing  desk,  $3.50     (1[422a);  putting  new  border  on  an  old  rug,  $5. 

March  12.     He  paid  for  repairing  broken  chair,  $1.75;  repairing  gas  fixtures,  $3.60 

AVhat  did  each  account  show  at  the  close  of  the  fiscal  period,  March  31? 

(2)  S.  M.  Watson  &  Company  purchased  on  June  25  a  second-hand  mahogany 
desk  at  auction,  $29.60.     -  -  .July  3.     They  paid  for  repairs  on  the  desk,  $7.35. 

-  -  July  15.     They  paid    for   electric  fan,    $22.50— installation,    $2.25.     -  - 
July  18.     They  paid  for  repairs  on  clock,  $2.50;  for  a  directors'  table,  $42.50. 

Aug.  31.     Paid  for  typewriter   repairs,  $4.25;  on  the  same  day  they  paid 

for  a  new  sign,  $16.60.     -  -  Dec.  10.     They  paid  for  three  new  chairs,  $18.75: 
for  refinishing  two  chairs,  $2.60. 

What  did  each  account  show  at  the  close  of  the  fiscal  period,  December  31? 


exercises  in  repairs  and  renewals  117 

Arithmetical  Problems — Furniture  and  Fixtures  Investments  and  Repairs 

AND  Renewals. 

(1)  R.  S.  Mitctiell  paid  for  painting  his  radiators,  S3. 25;  typewriter  repairs, 
S6.75;  bookkeeper's  desk,  $27.50;  two  rugs  for  office,  $35;  electric  light  fixtures, 
$12.50;  repairs  to  electric  wiring,  $4.80;  repair  of  movable  partition,  $2.25;  hat 
rack,  $5.40;  new  sign,  $24;  repainting  old  sign,  $8.75.  He  disposed  of  a  desk  at 
cost  value,  $22.     He  received  for  rent  of  typewriter,  $12.50. 

What  is  the  cost  of  the  furniture  and  fixtures  on  hand,  and  of  the  repairs  and 
renewals? 

(2)  The  Bates  Hardware  Companj''  took  from  stock  for  their  own  use  one  floor 
truck,  $11.50:  one  pair  of  scales.  $16.75.  They  purchased  two  office  desks,  $84.50; 
one  typewriter,  $90;  two  show  cases,  $36;  one  filing  cabinet,  $45;  freight  on  the 
same,  $3.70.  They  paid  for  repairs  to  shelving  and  counters,  $9.25;  repairs  on 
show  cases,  $2.50.  They  purchased  a  typewriter  for  $80,  giving  in  exchange  th(^ 
old  machine  at  $40 ,  the  cost  value  of  which  was 


What  was  the  cost  of  furniture  and  fixtures,  and  of  repairs  and  renewals  for 
the  period? 

DELIVERY  EQUIPMENT  ACCOUNT. 

428.  Horses  and  wagons  is  the  name  sometimes  given  to  this  account.  It 
is  kept  to  show  the  amount  of  capital  invested  in  the  equipment  used  to  deliver  goods 
to  and  from  the  store  or  warehouse  or  to  customers.  Jo  must  be  distinguished  from 
the  delivery  expense  account  described  in  ^289, 

429.  It  is  a  capital  investment  account,  kept  for  the  purpose  of  showing  the 
original  cost  of  the  horses,  wagons,  harness,  blankets,  automobiles,  and  whatever  else 
constitutes  the  equipment  used  in  the  delivery  of  goods.  When  anything  charged 
to  this  account  is  disposed  of  the  account  is  credited,  not  for  the  selHng  price,  but 
for  the  original  cost  price  charged  to  the  account.  The  account  will,  therefore,  always 
show  a  resource  (asset)  for  the  difference,  which  is  the  cost  value  of  the  delivery  equip- 
ment on  hand. 

430.  When  delivery  equipment  has  depreciated  through  use  or  for  any  other 
reason,  the  depreciation  is  not  shown  in  this  account,  but  in  an  account  known  as  a 
"Reserve  for  Depreciation"  account,  which  is  explained  in  If 557a;  or  if  such  an  ac- 
count is  not  kept,  the  depreciation  should  be  charged  to  general  expense  account  or 
directly  to  profit  and  loss  account. 

430a.  In  preparing  the  statement  of  resources  and  liabilities,  depreciation  on 
property,  whether  estimated,  or  shown  in  a  separate  reserve  account,  should  be 
deducted  from  the  balance  shown  by  the  investment  account,  the  difference  be- 
ing extended  into  the  resource  column.  By  this  method,  it  will  be  seen  that  the 
depreciation  appears  on  the  statement  as  a  deduction  from  resources,  and  conse- 
quently should  not  appear  as  a  liability. 


118 


BOOKKEEPING  AND  ACCOUNTANCY 


Rule  for  Debiting  and  Crediting  Delivery  Equipment  Account. 
431.     Debit  delivery  equipment  account  for  costs:  credit  for  returns. 

431a.     Debit  delivery  equipment  under  an        4316.     Credit  delivery  equipment,  under  an 
appropriate  heading,  for  all  costs.  appropriate   heading,    al   cost   price,  for 

any  property  charged  to   this   account 
which  is  sold  or  otherwise  disposed  of. 

432.     Transactions  Illustrating  the  Various  Applications  of  the  Rule 
(^431)  FOR  Debiting  and  Crediting  Delivery  Equipment  Account. 

Jan.  1.     Paid  for  twohorses,  $200  (^431a) ;  one  wagon, $50;  two  sets  of  harness, 

$25. Jan.  5.     Paid  for  two  blankets,  $8.50 Jan.  25.     Paid  for  one  horse, 

$150. Jan.  28.     Paid  for  wagon,  $65;  harness,  $15.     Jan.  30.     Sold  one 

of  the  horses  purchased  on  January  1,  which  was  found  unsuitable,  at  cost  price. 
$100.     (•;4316)  ' 

Prepare  an  account  showing  the  cost  of  the  delivery  equipment  on  hand 
January  31,  as  shown  in  illustration  62. 


Illustration  CC. 


433.  The  difference  between  the  two  sides  of  a  delivery  equipment  account 
shows  the  original  cost  value  of  the  property  on  hand,  which  is  a  resource  which  should 
appear  as  an  item  in  the  statement  of  resources  and  liabilities. 

434.  To  close.  Follow  the  instructions  for  closing  real  estate  investment  ac- 
counts ^[386. 

PROFIT  AND  LOSS  STATEMENT. 


435.  The  profit  and  loss  statement  is  made  up  from  the  various  ledger  accounts 
showing  losses  and  gains. 


PROFIT   AND    LOSS    STATEMENTS 


119 


436.  Profit  and  loss  accounts  contain  all  the  facts  relating  to  the  costs  of 
expenses  and  the  returns  from  incomes.  These  facts  are  so  arranged  in  the  profit 
and  loss  statement  that  the  expenses  and  incomes  are  shown  '  'in  their  proper  relations. ' ' 
(^2).  They  may  be  shown  in  detail  to  any  extent  desired  by  the  sub-division  of  ac- 
counts, or  by  the  sub-division  of  the  items  shown  by  the  different  accounts  on  analy- 
sis sheets.  Like  the  trading  statement,  the  profit  and  loss  statement  is  frequently 
accompanied  and  supported  by  various  supplementary  statements,  exhibits,  etc, 

437.  The  final  result  shown  by  a  profit  and  loss  statement  is  the  net  profit  for 
the  fiscal  period  represented. 

438.  The  accounts  affecting  the  profit  and  loss  statement  are  shown  in  the 
following  list  made  up  from  the  illustrative  accounts  showing  losses  and  gains  in  the 
preceding  pages,  as  they  appear  in  the  trial  balance.  (Illustration  85)  The 
amounts  shown  represent  the  differences  between  the  two  sides  of  the  various 
accounts.  When  both  expenses  and  incomes  are  shown  in  the  same  account,  if 
it  is  desired  to  show  them  separately  in  the  statement,  the  footings  of  the  account 
instead  of  the  difference,  should  be  entered  on  separate  lines  in  the  trial  balance. 
An  illustration  of  an  account  showing  both  expenses  and  incomes  is  the  real  estate 
expense  and  income  account.     (^388) 

Section  of  Trial  Balance  Showing  Profit  and  Less  Accounts. 


Illustration  63. 


^?i^gg^y?'z--^-»-z-<c^-Z^^-t;^-^S--z/<TS^C--a^;^^^-r,.f:<£^ 


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439.  The  first  item  shown  in  the  illustration  of  the  profit  and  loss  statement 
(illustration  64)  is  the  gross  trading  profit  shown  by  the  profit  and  loss  account, 
which  was  opened  when  the  journal  entry  closing  the  trading  accounts,  after  the 
trading  statement  was  prepared,  was  posted  to  the  ledger.  This  account,  therefore, 
does  not  appear  in  the  final  trial  balance  shown  in  illustration  85  or  in  the  section 
shown  in  illustration  63. 

439a.  It  should  be  observed  that  the  closing  journal  entry  made  after  the 
trading  statement  is  prepared,  when  posted,  will  close  all  the  trading  accounts  in 
the  ledger,  and  that  the  gross  trading  profit  transferred  to  the  profit  and  loss  account 


120 


BOOKKEEPING   AND    ACCOUNTANCY 


equals  the  difference  between  the  total  debit  and  total  credit  balances  shown  by 
the  trading  accounts,  and  that,  consequently,  when  this  item  is  posted  it  will  main- 
tain the  equilibrium  of  debits  and  credits  in  the  ledger,  and  that  the  ledger  will  be 
in  balance.  The  posting  of  the  closing  journal  entry  for  the  trading  account  simply 
eliminates  these  accounts  from  the  ledger  and  introduces  in  their  stead  the  item 
showing  the  gross  trading  profit. 

440.  This  form  of  the  profit  and  loss  statement  is  known  as  the  report  form, 
which  is  generally  preferred  for  comparative  purposes,  and  for  that  reason  has  some 
advantages  for  purposes  of  instruction,  as  it  is  somewhat  simpler  than  the  technical 
form  shown  in  illustration  97. 


\^i^^^^^^?-t<i^nJ'-^ 


'^/,/f    ^^ 


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440a.  Illustration  64  shows  the  simplest  form  of  the  profit  and  loss  statemejit 
made  up  from  the  differences  (balances)  shown  by  the  profit  and  loss  accounts  as 
they  appear  in  the  trial  balance,  without  including  any  detailed  information  as  to 
the  various  items  constituting  the  amount  shown. 

4406.  Illustration  65  shows  the  same  statement,  with  the  important  items 
entering  into  the  cost,  selling  expenses,  administrative  expenses,  and  general  expen- 
ses given  in  detail.  The  items  can  be  readily  ascertained  by  referring  to  the  saies 
expense,  administrative  expense,  and  general  expense  accounts,  the  amount  on  the 
statement  being  composed  of  one  or  more  of  the  items  given  in  the  explanation 
columns  of  the  accounts. 

440c.  To  secure  this  detailed  information  in  accounts  containing  any  con- 
siderable number  of  items  or  extending  over  the  usual  fiscal  period  of  one  year,  it 
will  be  necessary  to  separate  them,  for  each  account,  on  an  analysis  sheet,  which  is 
fully  explained  and  illustrated  in  1490. 


PROFIT   AND    LOSS   STATEMENTS 


121 


Illustration  65. 


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3fa 


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Preparation  of  the  Profit  and  Loss  Statement. 


CREDITS. 


440d.  Explanation.  Read  carefully  ^435  to  1[440c  inclusive.  The  credits 
are  shown  first  in  this  (the  report)  form  of  the  profit  and  loss  statement. 

(1)  The  gross  trading  profit,  $2009.18,  is  the  profit  shown  by  the  trading  state- 
ment. (1242,  ill.  40)  Other  credits,  shown  by  any  account  in  whicli  incomes  are 
entered,  should  follow  this  item,  as  will  be  shown  in  later  examples. 


122  BOOKKEEPING   AND   ACCOUNTANCY 

DEBITS. 

(1)  When  the  statement  is  made  up  from  the  differences  showTi  by  the  profit 
and  loss  accounts,  the  first  three  accounts  should  be  entered  in  the  order  sho^^^l  on 
the  statement,  i.e.,  selling  expenses  first,  administrative  expenses  second,  general 
expenses  third.  Other  items  may  appear  in  whatever  order  they  occur  in  the 
trial  balance. 

(2y  When  the  various  expenditures  included  in  the  sales,  administrative,  and 
general  expense  accounts  are  to  be  given  in  detail,  as  sho-rni  in  illustration  65,  they 
must  first  be  ascertained  before  the  profit  and  loss  statement  can  be  prepared. 
The  method  of  ascertaining  these  various  expenditures  is  fully  explained  in  *:A9Q. 

(3)  The  net  profit  for  the  period  is  found  by  taking  the  difference  between  the 
total  debits  and  the  total  credits.  If  the  debits  are  the  larger,  the  difference  is  the 
7iet  loss  for  the  period. 

(4)  In  preparing  the  profit  and  loss  statement,  refer  to  the  ledger  accounts 
for  detailed  information,  when  necessary. 

441.  Prepare  a  profit  and  loss  statement  like  illustration  64,  referring  to  the 
section  of  the  trial  balance  for  each  item  as  it  is  entered,  and  present  for  approval. 

441a.  Prepare  a  profit  and  loss  statement  like  illustration  65,  showing  on  a 
separate  sheet  the  items  named  in  the  ledger  accounts  which  make  up  the  various 
expenditures  shown  in  the  profit  and  loss  statement,  and  present  for  approval. 

Principles  Involved  in  the  Making  of  a  Profit  and  Loss  Statement. 

442.  Observe  that  the  following  principles  apply  in  determining  the  net  profit 
or  the  net  loss  in  the  profit  and  loss  statement: 

(a)  Any  account  or  item  that  has  increased  the  cost  of  expenses  or  decreased 
the  returns  from  incomes  has  decreased  the  net  profit  or  increased  the  net  loss  for 
the  period. 

(6)  Any  account  or  item  that  has  decreased  the  cost  of  expenses  or  increased 
the  returns  from  ir  comes  has  increased  the  net  profit  or  decreased  the  net  loss  for 
the  period. 

443.  To  find  the  net  trading  profit.  The  gross  trading  profit  less  the  selling  ex- 
penses gives  the  net  trading  profit,  which  is  the  profit  on  the  goods  sold  after  both 
cost  price  and  the  selling  expenses  have  been  deducted. 

444.  The  object  of  finding  the  net  trading  profit  is  (a)  to  ascertain  whether  or 
not  the  sales  have  been  made  on  a  proper  margin  of  profit,  (6)  to  ascertain  whether 
or  not  the  total  selling  expense  is  in  proper  proportion  to  the  total  sales  made,  and 
(c)  to  permit  of  a  comparison  of  the  net  selling  profit  on  the  sales  of  one  fiscal  period 
with  the  net  selling  profit  on  the  sales  of  another  similar  fiscal  period. 


PROFIT    AND    LOSS    PERCENTAGES 


123 


444o.  The  difference  between  the  7iet  trading  profit  and  the  gross  trading 
profit  is  that  the  former  is  the  profit  after  the  selling  expenses  have  been  deducted, 
while  the  latter  is  the  profit  before  the  selling  expenses  liave  been  deducted. 

4446.  In  the  profit  and  loss  statement,  illustration  65,  the  net  trading  profit 
is  the  difference  between  S2009.18,  the  gross  trading  profit,  and  $380.60,  tfip  selling 
expenses,  or  $1628.58. 

445.  Comparisons  of  the  facts  shown  in  a  profit  and  loss  statement  are  usually 
made  on  a  percentage  basis.    The  percentages  are  found  as  follows: 

(a)  The  total  selling  expense  divided  by  the  gross  trading  profit  will  give  the 
percentage  of  the  gross  trading  profit  required  to  meet  the  selling  expenses. 

(b)  The  total  administrative  expense  divided  by  the  gross  trading  profit  will 
give  the  percentage  of  the  gross  trading  profit  required  to  meet  administrative 
expenses. 

(c)  The  total  general  expense  divided  by  the  gross  trading  profit  will  give  the 
percentage  of  the  gross  trading  profit  required  to  meet  general  expenses. 

(r/)  The  percentage  of  the  gross  profit  required  to  meet  any  other  expenses 
may  }>e  found  in  the  same  manner. 

(e)  The  total  selling  expense  divided  by  the  cost  of  the  merchandise  sold  will 
give  the  percentage  of  the  cost  price  which  must  be  added  to  meet  selling 
expenses.  The  percentage  to  be  added  to  the  cost  price  of  the  merchandise  sold 
to  meet  administrative  or  any  other  expenses  may  be  found  in  the  same  manner. 
These  percentages  are  useful  in  fixing  the  selling  prices  of  goods. 

Note. — These  percentages  must  not  be  confused  with  the  percentages  on  capital. 

To  Close  Ledger  Accounts  Shown  in  the  Profit  and  Loss  State- 
ment BY  Separate  Journal  Entries. 

446.  When  the  profit  and  loss  statement  has  been  completed,  a  journal  entry  is 
prepared  to  close  all  the  accounts  in  the  ledger  containing  the  amounts  shown  in  the 
statement,  the  net  profit  or  the  net  loss  appearing  as  one  or  more  items  in  the 
entry  to  balance  it,  which  is  transferred  to  the  proper  side  of  the  undivided  profits 
account  in  the  ledger,  or  to  such  capital,  reserve,  surplus  or  other  accounts  as 
should  receive  the  distribution  of  all  or  part  of  the  profits  or  losses. 

447.  The  purpose  of  closing  the  various  accounts  included  in  the  profit  and  loss 
statement  is  to  indicate  the  close  of  a  biisiness  period,  and  thus  to  eliminate  them  as 
open  accounts  in  the  ledger,  preparatory  to  their  receiving  the  entries  of  a  new  busi- 
ness period.     This  is  the  principal  reason  for  closing  any  account  in  the  ledger. 

Rule  for  Closing  Profit  and  Loss  Accounts. 

448.  Debit  profit  and  loss  accovnis  showing  credit  balances.  Credit  profit 
and  loss  accounts  showing  debit  balances. 


124  BOOKKEEPING    AND   ACCOUNTANCY 

448a.  Illustration  GG  shows  the  correct  journal  entry  to  close  the  accounts  in- 
cluded in  the  profit  and  loss  statement  when  it  is  desired  to  open  an  undivided  profits 
account  (^450)  in  the  ledger.    Prepare  this  journal  entry  and  present  for  approval. 


Illustration   66. 


J^l^<f-^^ 


7.^0 


7 

4486.     Undivided  profits  account  may  be  omitted  from  the  ledger,  as  explained 

^486a. 

Exercises  IxN  Preparing  Profit  and  Loss   Statements. 

449.  Prepare  profit  and  loss  statements  for  the  following  profit  and  loss  ac- 
counts as  they  appear  on  the  various  trial  balances  shown,  and  present  for  approval. 
The  first  example  is  an  exact  duplication  in  form  of  the  profit  and  loss  statements 
shown  in  illustrations  66  and  65,  the  only  difference  being  in  the  amounts  and  in  the 
length  of  the  fiscal  period,  which  is  one  year  instead  of  one  month. 

(1)  The  profit  and  loss  accounts  as  they  appear  in  the  trial  balance  of  Hughes 
&  Hillen  for  the  fiscal  3^ear  ending  December  31  are  shown  in  illustration 
67.  The  gross  trading  profit  shown  bv  the  trading  statement  for  the  period  is 
$23,8/6.40 

Illustration   67. 


(a)  Prepare  a  profit  and  loss  statement  showing  the  net  profit  for  theperioxl, 
using  illuistration  G4  as  a  model,  and  then  prepare  the  journal  entry  to  close  the 
profit  and  loss  accounts  in  the  ledger,  and  present  for  approval. 


EXERCISES   IK   PROFIT   AND    LOSS    STATEMENTS  125 

(b)  An  analysis  of  the  sales,  administrative,  and  general  expense  accounts 
for  the  year  shows  that  the  items  for  which  these  expenditures  were  made  are  as 
follows : 

Selling  expenses, — sample  cases,  $90.44;  advertising  and  premiums,  $642.30; 
delivery  charges,  $426.25;  salesmen's  salaries  and  commissions,  S1400;  traveling 
expenses,  $125.10;  miscellaneous,. $152.51.     Total,  $2836.50. 

Administrative  expenses, — office  supplies,  $152.16;  legal  advice,  $15;  salaries 
of  office  help,  $815.60;  managers'  salaries,  $3000;  miscellaneous,  $144.86.  Total, 
$4127.62. 

(c)  Prepare  a  profit  and  loss  statement  showing  in  detail  the  selling,  adminis- 
trative and  general  expenses,  using  illustration  65  as  a  model,  and  present  for 
approval. 

General  expenses, — light  and  heat,  $315.25;  rent,  $1200;  miscellaneous,  $25.99. 
Total,  $1541.24. 

Note:  The  journal  entry   to   close   the    profit   and   loss  accounts  are  the  same  for  both 
forms  of  the  profit  and  loss  statement. 

(2)  Negley  &  Company's  gross  trading  profit  shown  by  the  trading  statement 
for  the  half  year  ending  June  30  is  $34,881.18.  The  various  profit  and  loss  accounts 
appearing  in  their  trial  balance  ot  that  date  are  shown  in  illustration  68. 

Illustration  68. 


Ls 


2S 


(a)  Prepare  a  profit  and  loss  statement  showing  the  net  profit,  using  iiiustra- 
tion  64  as  a  model.  Then  prepare  the  journal  entry  to  close  the  profit  and  loss 
accounts  in  the  ledger,  debiting  all  accounts  showing  credit  balances  and  crediting 
all  accounts  showing  debit  balances,  and  present  for  approval.  Illustration  69 
shows  the  arrangement  of  the  credit  accounts  showing  gains,  following  the  amount 
of  the  gross  trading  profit.  The  remainder  of  the  statement  is  similar  to  illustra- 
tion 64. 


Illustration  69. 


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Lj2yl-£-^:^^<l^€^ 


,,^&4^<Hi^^^^,^i^i;i.-t^C-e^<>'t^  ^^iyut^-'^ Jt/ffr/  y' 


126 


BOOKKEEPING   AND   ACCOUNTANCY 


(6)  Analysis  sheets  made  up  from  the  sales  expense  and  administrative  expense 
accoimts  show  the  following  results: 

Selling  expenses, — salesmen's  salaries,  $1600;  traveling  expenses,  S954.50; 
advertising,  $436;  delivery  expenses,  $610;  miscellaneous,  $59.62.     Total,  $3660.12. 

Administrative  expeyises, — officers'  salaries,  $4000;  office  help,  $1400;  office 
supplies,  $415.25;  miscellaneous,  $318.31.     Total,  $6133.50. 

General  expenses,— rent,   $1800;  miscellaneous,   $138.27.     Total,   $1938.27. 

(c)  Prepare  a  profit  and  loss  statement,  using  illustration  65  as  a  model,  and 
present  for  approval. 

(3)  The  Allen  &  Briscoe  Company  close  their  books  annually,  December  31. 
Instead  of  a  single  selling  expense  account,  they  kept  separate  accounts  with  sa/es- 
men's  salaries  and  traveling  expenses  (•|268a-c),  advertising  (^268/),  delivery  expenses 
(^268(/),  and  freight  (^268i).  Other  selling  expense  items  are  charged  to  the  sales 
expense  account.  In  like  manner,  instead  of  a  single  administrative  expense  account . 
they  kept  separate  accounts  with  officers  and  clerks'  salaries  (^,f301a,  6),  and  office 
supplies  and  expenses  (^301c),  other  items  being  charged  directly  to  the  adminis- 
trative expense  account. 

At  the  time  of  closing,  after  the  trading  statement  was  prepared  and  the 
journal  entry  closing  the  trading  accounts  had  been  posted,  with  the  gross  trading 
profit  carried  to  the  credit  of  tne  profit  and  loss  account,  the  ledger  contained 
the  following  accounts  showing  profits  and  losses.  Observe  that  they  include 
purchase  discounts  and  sales  discounts,  which  are  considered  by  this  company  as 
profit  and  loss  accounts.     (^[218,  11219,  ^2206,  ^2256.  ^[2266,  112316) 


Illustration  70. 


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DISTRIBUTION    OF   PROFITS  127 

a.  Prepare  a  profit  and  loss  statement  showing  the  net  profit  for  the  period, 
using  illustrations  65  as  a  model.  There  are  two  items  shown  in  the  profit  and  loss 
account  which  should  appear  separately  in  the  statement. 

b.  Prepare  the  journal  entry  to  close  the  profit  and  loss  accounts  in  the  ledger, 
debiting  all  accounts  sliowing  credit  balances  and  crediting  all  accounts  showing 
debit  balances.  Credit,  undivided  profits  account  for  the  difference  between  the 
total  debit  and  credit  items. 

c.  What  is  the  net  trading  profit  shown  by  this  statement?     ('^443) 

d.  What  percentage  of  the  gross  trading  profit  was  required  to  meet  the 
selling  expenses?     (144517) 

e.  What  percentage  of  the  gross  trading  profit  was  required  to  meet  the  admin- 
istrative expenses?     (^4456) 

Arithmetical  Problems — Profit  and  Loss  Accounts  and  Statements. 

(1)  If  the  gross  trading  profit  is  $9341.46,  and  the  selling  expense  $1050.50. 
what  is  the  net  trading  profit?  (^445)  What  percentage  of  the  gross  trading 
profit  is  the  selling  expense? 

(7)  If  the  gross  trading  profit  is  $12,736.15,  selling  expense  $1421.50,  adminis- 
trative expense  $1850,  general  expense  $315,  what  percentage  of  the  grosstrading 
profit  is  requu-ed  to  meet  each  expense? 

(3)  If  the  gross  trading  profit  is  $18,950,  and  the  total  expenses  from  all  sources 
$6724.75,  what  percentage  of  the  gross  trading  profit  is  required  to  meet  the  expenses 
of  the  business? 

DISTRIBUTION  OF  UNDIVIDED  PROFITS. 

450.  Undivided  profits  account  is  usually  kept  to  show  the  net  profits  of  each 
fiscal  period,  and  also  to  show  what  disposition  has  been  made  of  them.  Undivided 
profits  is  (a)  credited  for  the  net  profits  shown  by  the  profit  and  loss  statement 
and  (6)  debited  for  the  amount  of  these  profits  carried  to  ether  accounts.  If  part 
(or  all)  of  the  undivided  profits  are  not  distributed,  the  remainder  shows  a  credit 
balance  in  the  undivided  profits  account,  until  otherwise  disposed  of.  Undivided 
profits  really  increase  the  working  capital  of  the  concern  to  that  extent,  whether 
they  remain  in  that  account  or  in  a  surplus  or  a  reserve  account;  but  these  accounts 
should  not  be  confounded  with  sinking  or  redemption  fund  accounts,  which  rep- 
resent funds  that  are  taken  out  of  the  working  capital  of  the  business. 

450a.  Not  infrequently  undivided  profits  account  is  kept  so  that  it  shows  only 
the  profits  of  the  concern  that  are  left  over  after  allotments  of  the  profits  have 
been  made  to  other  accounts.  This  is  particularly  the  case  in  the  accounts  of 
corporations,  where  the  profits  are  distributed  to  stockholders  on  a  percentage 
basis,  through  a  dividend  account.  The  undivided  profits  account  must  not  be 
confused  with  the  surplus  account  which,  while  similar  in  its  purpose,  has  a  different 
meaning  attached  to  it  in  the  preparation  of  profit  and  loss  and  financial  statements. 


13S 


BOOKKEEPING   AND    ACCOUNTANCY 


451.  The  disposition  of  undivided  profits  is  determined  entirely  by  the  wishes 

of  the  owner  of  the  business.  When  the  business  is  conducted  by  an  individual  or 
a  firm,  the  profits  are  usually  carried  to  the  credit  of  the  proprietor  or  partners' 
capital  investment  or  personal  accounts,  or  both;  when  conducted  by  a  corporation, 
they  are  distributed  in  whatever  manner  the  board  of  directors  may  determine, 
for  the  payment  of  dividends,  or  for  such  surplus,  reserve  or  other  accounts  as  may 
be  required  to  meet  the  conditions  of  the  business. 

452.  The  distribution  of  any  part  of  the  net  profits  shown  by  the  undivided 
profits  account  is  made  by  journal  entry. 

Exercises  in  Distributing  Net  Profits  Shown  by  the  Undivided 

Profits  Account. 

453.  The  following  illustrations  show  the  journal  entries  for  the  undivided 
profits  as  stated  in  the  different  examples.  Prepare  the  journal  entry  for  each,  and 
present  for  approval. 

(1)  The  net  profit  shown  by  the  profit  and  loss  statement  of  January  31  of 
F.  A.  Raymond,  as  per  his  instructions,  is  to  be  distributed  as  follows:  |2U0  to  be 
credited  to  his  personal  accomit  to  balance  that  account,  (illustration  11)  and 
$1002.46  to  be  credited  to  his  investment  account,  illustration  10.     {*(\&2j) 

a.     The  journal  entry  to  close,  per  these  instructions,  is  as  follows: 


Illustration  71. 


^^'t'l'^^it't^^^^^C^jSi-f^^u^ 


^J^aA 


&.     If  his  instructions  were  to  transfer  the  entire  net  profit  for  the  period  to 
his  investment  account,  the  journal  entry  Avould  be: 


Illustration  72. 


J/ 


/2<P2    ¥C> 


/2-CZ    ^^ 


c.  If  it  had  been  his  intention  to  withdraw  his  net  profits,  then  the  best 
practice'  would  be  to  credit  his  personal  account  instead  of  his  capital  investment 
account,  in  which  case  the  journal  entry  would  be  as  follows: 


EXERCISES    IN    DISTRIBUTION    OF    PROFITS  12d 

Illustration  73. 

J/ 

(2)  B.  F.  Wade  &  C.  E.  West  are  equal  partners.  Wade's  personal  account 
shows  a  debit  balance  of  $650.  West's  personal  account  shows  a  debit  balance  ot 
$1000.  Their  net  profit  for  the  period,  as  shown  by  the  undivided  i)rofits  account, 
is  $3568,  which  is  to  be  divided  equally  between  them.  Each  partner's  personal 
account  is  to  be  debited  and  credited  with  such  an  amount  as  will  close  it,  the 
remainder  to  be  credited  to  his  investment  account. 

The  following  is  the  journal  entry  to  adjust: 

Illustration  74. 

_?/ 


(3)  The  profit  and  loss  statement  of  the  Stilson  Machine  Company  shows  net 
profits  at  the  close  of  the  fiscal  year,  December  31,  of  $8580.50,  which  has  been 
transferred  to  the  credit  of  undivided  profits  account.  At  a  meeting  of  the  board 
of  directors,  a  dividend  of  8%  of  the  capital  stock  of  $40,000  was  declared,  and  it 
was  directea  that  $5000  should  be  transferred  to  the  surplus  account  as  an  addition 
to  the  working  capital,  the  remainder,  $386.50,  to  remain  as  undivided  profits. 

The  journal  entry  to  adjust  is  as  follows: 

Illustration  75. 

J/ 


(4)  The  profit  and  loss  statement  of  M.  G.  Nilan  shows  a  net  profit  of  $3160. 
His  personal  account  shows  a  debit  balance  of  $156.45.  He  has  instructed  his 
bookkeeper  to  make  a  journal  entry  to  balance  this  account,  transferring  the 
remainder  to  his  capital  investment  account.     Prepare  the  journal  entry. 


1 

t 

rxo0 

130  BOOKKEEPING    AND    ACCOUNTANCY 

(5)  0.  P.  Hamlin  &  F.  W.  Gay  :*re  partners  in  a  business  in  which  Mr,  Hamlin 
has  a  two-thirds  interest  and  Mr.  Gay  a  one-third  interest  in- net  profits  amounting 
to  $5630.10.  JNIr.  Hamlin's  personal  account  is  debited  for  S445.  Mr.  Gay's  personal 
account  is  debited  for  $556.  These  accounts  are  to  be  credited  with  such  parts  of 
each  partner's  profits  as  will  balance  them,  the  remainder  to  be  credited  to  their 
capital  investment  accounts.     Prepare  the  proper  journal  entry  to  adjust. 

(6)  The  undivided  profits  account  in  the  books  of  the  M.  R.  Hale  Company 
show  a  credit  balance  of  $17319.75.  A  dividend  of  6%  has  been  declared  on  the 
capital  stock  of  $50000.  Of  the  remainder,  $3000  has  been  set  apart  as  a  ''  Reserve 
Fund  for  Depreciation,"  and  $10000  as  a  surplus  to  increase  the  working  capital 
of  the  business,  the  remainder,  $1319.75,  to  remain  to  the  credit  of  undivided  profits 
account.     What  is  the  journal  entry  to  adjust? 

JOURNALIZING,  POSTING,  CHECKING  TRIAL  BALANCES,  ETC. 

454.  Journalizing  is  determining  the  proper  accounts  to  be  debited  and  credited 
for  each  transaction.  This  does  not  mean  that  all  journal  entries  must  be  made  in  a 
journal.  The  proper  accounts  to  be  debited  and  credited  are  determined  as  the  en- 
tries are  made,  whether  in  the  cash  book,  sales  book,  purchase  book,  note  books, 
journal,  or  any  other  book  used  as  a  posting  medium.  In  a  broad  sense, 
journalizing  is  the  classification  of  transactions. 

454a.  The  proper  accounts  to  be  debited  and  credited  are  determined  by 
applying  the  rules  of  bookkeeping.  (1[18)  These  rules  are  set  forth  in  detail  in 
the  various  accounts  illustrated  in  this  text. 

455.  Posting  is  transferring  to  the  ledger  the  debit  and  credit  items  from  the 
different  books  in  which  entries  are  made.  All  debit  items  in  the  different  books 
a''e  posted  to  the  debit  side  of  the  account  named  in  the  ledger  and  all  credit  items 
ar".  posted  to  the  credit  side  of  the  account  named  in  the  ledger. 

455a.  Boohs  of  original  entry  are  those  books  which  contain  the  original  or 
firs*-;  entries  of  transactions.  All  such  books  do  not  necessarily  contain  items  to  be 
posted  to  the  ledger,  as  the  items  may  first  be  transferred  to  some  other  book — for 
vnstance  when  notes  receivable  and  payal)le  are  transferred  from  the  note  book  to 
the  journal  before  posting.  Books  containing  items  to  be  posted  to  the  ledger  are 
known  as  posting  mediums. 

456.  Checking.  There  are  different  methods  of  checking  accounts.  A  simple 
and  effective  method  is  to  check  each  item  in  the  ledger  thus  ( . )  with  a  pencil  on 
the  double  line  just  to  the  left  of  the  amount,  and  then  to  check  the  entry  in  the 
book  from  which  it  is  posted  thus  (\/).  The  items  are  checked  in  the  order  in  which 
they  occur  in  the  books  from  which  they  are  posted.  Other  methods  of  checking 
win  be  described  and  illustrated  in  the  various  sets  included  in  this  work. 


TRIAL   BALANCEa  131 

TRIAL  BALANCES,  TNVENTORIES,  STATEMENTS,  ETC. 

457.  The  system  of  double  entry  bookkeeping  requires  that  the  debits  and 

credits  of  each  transaction  must  he  equalin  amount,  that  where  one  account  is  debited 
for  a  given  amount  some  other  account  is  credited  for  an  equal  amount.  It  follows 
that  if  the  debits  and  credits  of  each  transaction  are  equal  in  amount,  the  total  debits 
and  credits,  as  exhibited  in  all  the  ledger  accounts,  must  be  equal  in  amount.  This 
equality  of  debits  and  credits  is  not  necessarily  maintained  by  entering  the  same 
amounts  on  each  side  of  the  ledger,  as  one  debit  may  equal  the  sum  of  a  number  of 
credits  and  vice  versa. 

458.  Taking  a  trial  balance  means  to  hst  or  schedule  the  accounts  in  the  ledger, 
or  ledgers,  remaining  open  at  the  end  of  a  certain  specified  day,  giving  the  name 
and  the  debit  or  credit  balance  of  each  account,  and  showing  an  equal  aggregate 
sum  of  debits  and  credits.  Accounts  are  usually  entered  in  the  trial  balance  in 
the  order  in  which  they  occur  in  the  ledger.  If  the  debit  side  of  the  account  is  the 
larger,  the  difference  is  placed  in  the  debit  column  of  the  trial  balance,  and  vice 
versa. 

458a.  If  the  total  debits  and  credits  shown  by  the  footings  of  the  trial  balance 
are  equal,  it  proves  only  that  all  debit  items  have  been  posted  to  the  debit  side  of 
the  ledger,  and  that  all  credit  items  have  been  posted  to  the  credit  side  of  the 
ledger;  but  it  does  not  prove  that  each  account  in  the  ledger  is  correct,  as  errors 
may  have  been  made  in  journalizing  or  in  posting  to  the  wrong  account  in  the  ledger, 
which  would  not  disturb  the  equality  of  debits  and  credits.  Such  errors  are  usually 
found  by  checking  or  when  the  monthly  statements  of  account,  which  are  usually 
issued  to  all  debtors  and  received  from  all  creditors,  are  compared  with  the  accounts 
of  the  party  receiving  them.  Accounts  that  balance  should  be  omitted  from  the 
trial  balance. 

4586.  Trial  balances  should  be  taken  monthly  or  quarterly,  preferably 
monthly. 

459.  The  object  of  taking  a  trial  balance  is  two-fold,  first  to  ascertain  whether 
or  not  the  debits  and  credits  in  the  ledger  are  equal,  and  second  to  ascertain  the 
results  shown  by  each  account,  and  from  these  results  as  shown  by  the  final  trial  bal- 
ance for  the  fiscal  period  to  prepare  the  various  statements  exhibiting  the  condition 
of  the  business  at  the  close  of  the  fiscal  period. 

460.  Each  account  shows  one  of  four  different  results,  namely,  a  resource, 
a  liability,  a  loss,  or  a  gain.  They  may  be  divided  into  two  general  classes,  those 
showing  resources  and  liabilities  and  those  showing  losses  and  gains.  A  single  ac- 
count should  never  show  more  than  one  result  in  the  trial  balance.  Losses  and  gains 
are  usually  referred  to  as  profits  and  losses.  Profits  and  losses  have  already  been 
described.     (^251) 


132  BOOKKEEPING   AND   ACCOUNTANCY 

460a.  Occasionally  an  account  will  snow  an  exception  to  the  foregoing  rule. 
Offsetting  accounts,  such  as  reserve  and  contingent  accounts,  show  results  that 
are  somewliat  different.  These  accounts  and  their  uses  will  be  fully  explained  in  a 
separate  chapter. 

461.  A  resource  (or  asset)  is  anything  of  value  belonging  to  a  person,  firm  or 
corporation,  such  as  cash,  property,  or  debts  owed  by  others.  Resources  refer  to 
money  or  other  j^roperty  that  can  be  readily  converted  into  current  funds  to  meet 
the  payment  of  bills  in  a  going  concern.  Assets  refer  more  particularly  to  the  prop- 
erty of  a  deceased  person,  or  to  the  property  of  an  insolvent  or  bankrupt  which  is 
applicable  to  the  payment  of  his  debts  or  liabilities. 

461a.  Current  resources  are  those  that  pass  more  or  less  continuously  in  the 
course  of  business,  constituting  the  working  capital,  particularly  those  that  are 
available  to  meet  current  obligations,  such  as  cash,  notes  and  accounts  receivable, 
etc.;  fixed  resources  are  those  represented  in  more  permanent  investments,  such  as 
real  estate,  dchvery  equipment,  furniture  and  fixtures,  etc.  Fixed  resources  are 
closely  identified  with  capital  investment  accounts. 

462.  A  liability  is  a  debt  owing  by  a  person,  firm  or  corporation. 

462a.     Current  liabilities  are  those  that  are  to  be  met  from  current  funds. 

463.  The  final  trial  balance  at  the  close  of  the  fiscal  period  should  not  be  taken 
until  (a)  all  the  transactions  which  properly  belong  to  that  period  have  been  en- 
tered in  the  bocks  and  included  in  the  results  shown  by  the  various  accounts,  and 
(b)  all  viventories,  not  only  of  merchandise  but  also  of  other  property  on  hand  and 
of  accrued  debts  owing  to  us  and  to  others  not  shown  on  the  books,  have  been  pre- 
pared. 

464.  Inventories.  The  merchandise  inventory  is  a  statement  or  schedule  of 
merchandise  on  hand  or  in  stock.  This  inventory  is  fully  described  in  ^169-|[175 
inclusive,  and  is  the  only  inventory  to  be  included  in  the  principal  inventory  ac- 
count, which  is  a  trading  account  and  affects  the  trading  statement.  \ 

465.  Other  inventories  consist  of  (a)  all  mat(U'ial,  supplies  or  other  property 
on  hand  that  has  been  charged  to  a  trading  or  a  profit  and  loss  account,  which  has  not 
been  used  up  or  otherwise  disposed  of  in  the  fiscal  period  in  which  it  was  purchased, 
and  (6)  of  interest,  taxes,  rents,  commissions,  or  other  expenses  and  incomes  ichich 
have  accrued  at  the  close  of  the  fiscal  period,  but  which  are  not  entered  on  the  books 
and  frequently  are  not  due.  For  this  reason  this  class  of  inventories  are  known  as 
non-ledger  inventories. 

465a.  Real  estate,  stocks,  bonds,  machinery,  furniture,  fixtures,  materials  and 
supplies  which  are  included  in  the  various  ledger  accounts  showing  the  original  cost 
of  the  property  on  hand,  may  l)e  inventoried  when  there  is  a  considerable  increase  or 
decrease  between  the  original  cost  value  and  the  present  market  or  selling  value 
of  the  property,  if  it  is  desired  to  include  such  property  at  its  present  value  in  a 
statement  of  the  resources  of  a  bn^iness. 


INVENTORIES  133 

465&.  When  property  on  hand  is  inventoried  above  or  below  its  original  cost 
value,  the  difference,  if  a  loss,  should  be  debited  to  a  "reserve  for  depreciation" 
account;  if  a  gain,  to  a  "reserve  for  appreciation"  account.  An  owner,  if  an  indi- 
vidual, can  do  as  he  pleases  in  regard  to  increasing  or  decreasing  the  inventory 
value  of  the  property,  so  can  partners  providing  they  agree,  but  it  should  be  noted 
that  a  corporation  cannot  declare  a  dividend  legally  from  a  profit  of  this  kind  unless 
the  property  is  sold  and  the  profit  actually  realized. 

466.  The  object  of  taking  inventories  of  property  included  in  the  cost  of  pur- 
chases (the  merchandise  inventory)  and  of  materials  and  supphes  (trading  and  profit 
and  loss  accounts)  is  to  eliminate  from  the  accounts  representing  these  costs  those 
items  which  do  not  enter  into  the  costof  the  goods  sold  or  of  the  materials  and  supplies 
used  up  during  the  fiscal  period  in  which  they  were  purchased.  The  object  of  taking 
non-ledger  inventories  (^[465)  is  just  the  opposite,  the  purpose  being  to  include  them  in 
the  accounts  they  affect  which  already  appear  in  the  ledger  without  them,  so  that 
in  both  instances  the  total  resources  and  liabilities,  losses  and  gains,  net  profits  and 
losses,  etc.,  may  be  accurately  ascertained  and  shown  in  the  various  statements 
made  up  at  the  close  of  the  fiscal  period. 

466a.  All  inventories  affecting  profit  and  loss  accounts  should  be  avoided  as 
far  as  possible  by  holding  tlie  books  open  until  all  items  belonging  to  the  fiscal 
period  represented  are  e^itered  in  the  usual  way  and  included  in  the  final  trial  balance 
taken  preparatory  to  making  up  the  various  statements.  Every  bookkeeper  or 
accountant  who  has  had  any  extended  experience  knows,  however,  that  this  is 
almost  impossible  in  a  business  of  any  magnitude,  and  that  for  many  such  items  the 
easiest  method  to  dispose  of  them  is  to  treat  them  as  inventories. 

467.  All  inventories  of  property  on  hand  or  of  debts  owing  to  us  are  resources; 
all  debts  owing  to  others  are  liahilities. 

468.  Non- ledger  resource  and  liability  inventories  relate  principally  to  profit 
and  loss  accounts  showing  expenses  and  incomes.  When  an  expense  account  is  sub- 
divided into  separate  accounts,  each  item  in  the  inventory  affects  the  account  in 
which  it  was  originally  charged. 

468a.  Resource  inventories  affecting  profit  and  loss  accounts  consist  of  (1) 
the  cost  value  of  any  material,  supplies,  or  other  property  on  hand  (not  used  up) 
at  the  close  of  the  fiscal  period,  which  was  charged  to  a  profit  and  loss  account,  (2) 
the  unexpired  value  of  any  use  or  service  at  the  close  of  the  fiscal  period  which  was 
charged  to  a  profit  and  loss  account  ('[461)  and  (3)  accrued  interest,  rent,  and 
commissions,  etc.,  owing  from  others  and  not  entered  at  the  close  of  the  fiscal  period. 

4686.  Liability  inventories  affecting  profit  and  loss  accounts  consist  of  (1) 
unpaid  salaries,  commissions,  traveling  expenses,  wages,  freight,  express  or  drayage 
bills,  rent,  or  any  other  unpaid  expense  incurred  in  and  not  paid  or  entered  at  the 
close  of  the  fiscal  period,  and  (2)  accrued  interest,  rent,  taxes,  commissions,  etc. 
owing  +0  others  and  not  entered  at  the  close  of  the  fiscal  period. 


134 


BOOKKEEPING    AND    ACCOUNTANCY 


468c.  Separate  accounts  should  be  kept,  one  for  sundry  resource  inventories  in 
which  all  such  inventories  may  be  grouped,  the  account  affected  being  indicated  in 
the  explanation  column,  and  another  for  sundry  liability  inventories,  the  different 
accounts  affected  being  similarly  indicated.  Separate  accounts  for  each  inventory 
taken  can  be  opened,  if  it  is  so  desired 


Rules  for  Debiting  and  Crediting  Resource  Inventories  Affecting 
Profit  and  Loss  Accounts. 


469.  Debit,  by  journal  entry,  sundry  re- 
source inventories  under  one  or  separ- 
ate headings,  at  the  close  of  each 
fiscal  period,  for  the  cost  value  of  all 
(each)inventories  on  hand  and  credit  the 
profit  and  loss  account  to  which  the 
items  were  charged. 


470.  Credit,  by  journal  entry,  sundry  re- 
source inventories  under  the  proper 
heading,  at  the  beginning  or  close  of 
the  next  fiscal  period,  for  all  (each) 
inventories  debited  to  this  account  at 
the  close  of  the  last  preceding  fiscal 
period  and  debit  each  account  which  was 
credited  at  that  time. 


471.     Transactions  Illustrating  the  Above  Rules. 

Resource  inventories.  At  the  close  of  the  fiscal  period,  December  31,  inven- 
tories were  taken  of  the  various  materials  and  supplies  on  hand,  the  total  amount  of 
each  inventory  being  as  follows:  sales  expense  account,  $36.50;  administration 
expense,  $24.19;  general  expense,  $16.50;  accrued  interest  receivable,  $14.50. 
(«i359m) 

Journal  entry,  rule  ^469. 


Illustration  76. 


'/^Z^^c^r^yj^i.^Sc^J/,  /f 


^a-Z^^  C^-X-^i.e^fT-^L£^      I 


CC-ei'yt-i-i^t-^i.-c^^^^^L'iX.-iii-^y'-A^  C<z^;^^.»^^e,X 


.'^it.'yx^CyL'CC^  C.'Z.^izc-yt^'..^^ 


ta^3:i^l^^:^. 


JU. 


^ 


Jj,    ^O 


X^\/f 


~"  r 


471a.  The  above  journal  entry,  when  posted,  will  show  the  sundry  resource 
inventories  account  as  follows,  at  the  close  of  the  fiscal  period.  The  amount  of 
each  inventory  could  be  shown  separately  on  the  trial  balance  or  the  total  amount 
shown  by  the  footing  of  the  account  (91 .69)  could  be  inserted.  The  account  always 
shows  a  resource. 


INVENTORIES 


135 


Illustration  77. 


^^y.-'i^T.^^^  Ay.A^7^..tyf^.,£y.  ':Jh-t^L/rc<^Kij!k'^u^ 


L£-S!iA. 


ryf7^^^^J>^ 


3-J-    C/W^m.  /  iSz^^-tftT^-^-g:  1 


3  / .  .^^^/y£cc^£<n^y.'^ 


3  A  ■•JhTJd.'t.^^ii-d^ 


M, 


-A 


2U    /f 


jLL-£A 


/^ 


j^ 


Journal  entry,  rule  ^470. 


Illustration  78. 


4716.  The  above  is  the  journal  entry  for  crediting  the  sunchy  resource  inven- 
tories account  al  the  beginning  of  the  next  fiscal  period,  although  it  could  properly  be 
made  at  any  time  during  or  at  the  close  of  the  next  fiscal  period.  It  will  be  noted 
that  this  journal  entry  is  just  the  opposite  of  tlie  journal  entry  illustrating  rule 
^[469,  the  object  being  to  transfer  back  into  the  proper  accounts  the  amounts  of 
the  various  inventories,  so  that  the  various  expenses  may  be  shown  in  the  fiscal 
period  in  which  the  materials,  supplies,  etc.,  were  used.  (^468a)  The  inventories 
account  balances  when  the  items  are  posted,  and  it  should  then  be  ruled  up  and 
footed,  as  shown  in  the  following  illustration. 


Illustration  79. 


.^fi^^U^f^.€:^4^A^C.d-<^t<A^C^^J^7^Zy'U'-^^ 


136 


BOOKKEEPING    AND   ACCOUNTANCY 


471c.  Instead  of  entering  the  inventories  separately  in  the  ledger  account,  as 
shown  in  illustrations  77  and  79,  they  may  be  entered  in  one  amount,  as  shown  in 
illustration  80,  in  which  case  the  amount  of  each  inventory  can  readily  be  ascer- 
tained by  referring  to  the  journal  entry. 


Illustration 


^,,J^yU..'yty£6^^  ^Q^l^<?t^^ 


'y/it^'7!        ffcl^,      /    \..dK^fU^JU*'^'rt^^KI^___\  fAC>f 


Rule  for  Debiting  and  Crediting  Liability  Inventories  Affecting 
Profit  and  Loss  Accounts. 


472.  Dchil  by  journal  entry,  sundry  lia- 
bility inventories  under  the  proper 
heading,  at  the  beginning  or  close  of 
the  next  fiscal  'period,  for  all  inven- 
tories credited  to  this  account  at  the 
close  of  the  last  preceding  fiscal  period, 
and  debit  each  account  which  was 
credited  at  that  time. 


473.  Credit  by  journal  entry,  sundry  lia- 
bilities inventories  under  one  or  separate 
headings,  attheclose  of  each  fiscal  period, 
for  the  amount  owed  for  expenses  which 
have  accrued,  and  which  have  not  been 
entered  on  the  books  debiting  the  proper 
accounts. 


474.  Transactions  Illustrating  the  Above  Rules. 

Liability  inventories:  At  the  close  of  the  fiscal  period,  December  31,  inventories 
for  unpaid  expense  bills  were  as  follows:  accrued  interest  payable,  $36.25  (358/); 
accrued  taxes,  $46;  unpaid  rent,  $75. 

Journal  entry,  rule  1473. 


Illustration  81. 


Jy2^^c^-'y>^■S^^^  J /,  /f 


Cc-<!t/'-t-^ 


Ji.    ZS 

/  2  / 


/jir7  ZS" 


474a.  The  following  illustration  shows  the  ledger  account  at  the  close  of  the 
fiscal  period,  when  the  above  journal  entry  is  posted.  This  account  then  always 
shows  a  liability. 


Illustration  82. 


3/    /S>^t^>^^JV^^^  „        /2,' 


ACCOUNTANCY 


137 


Journal  entry,  rule  1[472. 


Illustration 


/•^  ^^ 


/S-*^  ^  t:^?^^?^:^ 


/  2,  / 


_  4746.  The  above  is  the  journal  entry  for  debiting  the  sundry  liability  inven- 
tories account  at  the  beginning  of  the  next  fiscal  period.  The  entry  could  properly 
be  made  at  any  time,  either  during  or  at  the  close  of  the  next  fiscal  period.  Observe 
that  the  journal  entry  has  the  effect  of  placing  the  various  inventories  back  in  the 
accounts  to  which  the  items  were  originally  charged,  in  the  fiscal  period  in  which  the 
expense  was  incurred.     When  the  account  balances,  it  should  be  ruled  and  footed. 


Illustration  8-1. 


'-<dl.'-t-o^yi.^eC''t^'L 

^>A.<'€Z-^<.oc^^Kj'h'Z''t4-A.-ri^^^ 

-  T-    ■    UIUI 

~   ■                                        / 



j^^, 

/      t:^^T^-2S^t^<i-^ 

Ji> 

n 

^ 

3/     <:J}-uZZyLe^^ 

36,    2S 

/      /S-?^-^  r-'^ix-^iL-i^ 

/2/        i 

4- 

S/    /G^^tJ-P^^^t^i^ic^ 

/2/ 

1                                                                                       1 

/ST  2-5^ 

1 

/S7-  IS 

1 

1 

474c.  The  total  of  the  liability  inventories  may  be  entered  in  the  ledger 
account  instead  of  each  one  separately,  as  shown  in  illustration  80  for  resource 
inventories. 


CLOSING  THE  BOOKS,  STATEMENTS,  ETC. 

475.  Statements.  There  are  three  principal  statements  usually  prepared  from 
the  final  trial  balance,  (a)  the  trading  statement,  described  in  paragraphs  233-250,  (6) 
the  profit  and  loss  statement,  described  in  paragraphs  435-453,  and  (c)  the  statement 
of  resources  and  liabilities  (^487),  which  consists  of  a  list  of  all  the  resources  and 
liabilities  of  the  concern,  as  shown  by  the  books  after  all  accounts  showing  gains  and 
losses  have  been  closed  and  the  net  profit  or  the  net  loss  has  been  transferred  to  the 
proper  capital,  undivided  profits,  surplus  and  reserve  accounts. 


138  BOOKKEEPING    AM)    ACCOUNTANCY 

476.  The  trading  and  the  profit  and  loss  statements  which  are  shown  separately 
in  illustrations  40  and  65  are  usually  combined  and  made  up  as  a  single  statement, 
which  includes  the  distribution  of  the  net  profit  or  the  disposition  of  the  net  loss. 
Such  a  statement  is  really  divided  into  three  sections,  the  first  section  showing  the 
trading  statement,  the  second  section  showing  the  profit  and  loss  statement,  and  the 
third  section  showing  the  distribution  of  the  net  profits  or  the  disposition  of  the  net 
loss. 

477.  When  the  trading  and  profit  and  loss  statements  are  combined  into  one 
statement,  it  is  customary  to  prepare  therefrom  a  single  journal  entry  to  close  not 
only  the  trading  and  the  profit  and  loss  accounts  included  in  the  statement,  but 
also  to  dispose  of  the  net  profit  or  the  net  loss,  as  shown  in  the  distribution 
section  of  the  statement.     Illustration  88  shows  such  an  entry. 

478.  Separate  journal  entries  for  each  section  of  the  combined  trading  and  pro- 
fit and  loss  statement  may  be  made,  one  for  the  first  section  to  close  the  accounts 
included  in  the  trading  statement,  one  for  the  second  section  to  close  the  accounts  in- 
cluded in  the  profit  and  loss  statement,  and  one  for  the  third  section  to  transfer  the 
net  profit  or  the  net  loss  to  the  proper  capital,  surplus  or  reserve  accounts.  This 
method  is  illustrated  in  the  journal  entries  shown  in  illustrations  41,  42,  66,  71,  etc. 

478a.  For  beginning  students,  a  separate  journal  entry  for  each  section  i& 
preferable,  as  it  makes  a  distinct  separation  of  the  various  accounts  included  in  each 
section  of  the  complete  trading  and  profit  and  loss  statement,  and  besides,  it 
conforms  with  the  necessary  practice  when  the  conditions  described  in  the  following 
paragraphs  (^479,  •i480)  exist,  when  it  is  not  convenient  to  combine  them  in  one 
entry  for  the  entire  statement. 

479.  Some  accountants  and  business  men  prefer  to  have  formal  trading  and 
profit  and  loss  accounts  opened  in  the  ledger  at  the  time  of  closing  the  books,  each 
showing  the  same  debit  and  credit  items  as  are  shown  m  the  trading ajul  in  the  profit 
and  loss  statements,  on  the  theory  that  all  items  appearing  in  tiiese  statements  should 
be  supported  by  corresp(jnding  accounts  in  the  ledger.  When  this  plan  is  followed, 
these  accounts  are  opened  and  closed  at  the  time  of  closing  the  ledger  and  remain 
closed  until  the  next  closing  of  the  ledger,  unless  current  items  of  loss  or  gain  not 
properly  belonging  to  any  other  account  should  be  entered  into  the  profit  and  loss 
account  during  the  period.     ('1248,  ^448) 

480.  In  very  large  concerns  having  many  accounts,  it  is  practically  necessary, 
on  account  of  their  size,  to  make  separate  statements  for  the  trading  accounts  and  the 
profit  and  loss  accounts,  as  shown  in  illustrations  40  and  65,  as  well  as  for  the  dis- 


FINAL   TRIAL   BALANCE 


139 


tribution  of  the  net  profit  or  loss.  This  is  particularly  true  of  the  statement  showing 
the  distribution  of  the  net  profit  to  the  proper  capital  or  reserve  accounts,  which 
in  corporations  must  be  determined  by  action  of  the  board  of  directors.  Not 
infrequently  this  action  is  not  taken  until  several  days  after  the  close  of  the  fiscal 
period.  .  ' 

Principles  Involved  in  Determining  the  Results   Shown   by  the 
Various  Accounts  in  the  Trial  Balance. 


481.  Each  account  in  the  ledger  (excepting  those  referred  to  in  If 460a)  shows 
one  of  four  different  results,  as  stated  in  11460— a  resource,  a  liability,  a  loss,  or  a 
gain.  Debit  items  in  the  ledger  show  resources  or  losses:  credit  items  in  the  ledger 
show  liabilities  or  gains. 

482.  A  study  and  comparison  of  the  following  principles  will  assist  greatly  in  an 
understanding  of  the  accounts  shown  in  atrial  balance: 


a.  All  resources  are  debits,  and  are  invaria- 
bly found  on  the  debit  side  of  the  ledger. 

b.  All  losses  are  debits,  and  are  always  found 
on  the  debit  side  of  the  ledger. 

c.  Losses  always  result  in  a  decrease  in  the 
resources  or  an  increase  in  the  liabilities. 

d.  In  every  instance  when  an  account  is 
debited,  the  resources  or  losses  are  in- 
creased or  the  liabilities  are  decreased. 

e.  All  accounts  shoeing  losses  have  de- 
creased the  resources  or  increased  the 
liabilities,  and  consequently,  have  de- 
creased the  net  capital  or  increased  the 
net  insolvency. 

/.  The  total  losses,  if  the  larger,  less  the 
total  gains,  will  give  the  net  loss,  and 
consequently,  the  net  decrease  in  the 
resources  or  the  net  increase  in  the  lia- 
bilities. 


g.  All  liabilities  are  credits,  and  are  invari- 
ably found  on  the  credit  side  of  the  ledger- 

h.  All  gains  are  credits  and  are  always  found 
on  the  credit  side  of  the  ledger. 

i.  Gains  always  result  in  an  increase  in  the 
resources  or  a  decrease  in  the  liabili' 
ties. 

j.  In  every  instance  when  an  account  is 
credited,  the  liabilities  or  gains  are  in- 
creased or  the  resources  are  decreased. 

k.  Ail  accounts  showing  gains  have  in- 
creased the  resources  or  decreased  the 
liabilities,  and  consequently,  have  in- 
creased the  net  capital  or  decreased  the 
net  insolvency. 

I.  The  total  gains,  if  the  larger,  less  the 
total  losses,  will  give  the  net  gain  and 
consequently,  the  net  increase  in  the  re- 
sources or  the  net  decrease  in  the 
liabilities. 


483.  To  take  a  trial  balance.  When  all  transactions  and  items  belonging  to 
the  period  have  been  entered  and  posted,  as  stated  in  ^463,  list  the  ledger  accounts 
as  instructed  in  ^458.  The  final  trial  balance  taken  from  the  accounts  illustrated 
on  the  preceding  pages  is  shown  in  illustration  85. 


140 


BOOKKEEPING   AND   ACCOUNTANCY 


Illustraiion  85. 


^i^H^C€ZX^As''rzJ^i^lyyiy<^^^CZy^^^  /f        '=^(^^Zy^^2''2j«^;»?'Z-e?^?'Z-<3^ 


^j:^ 

^                          /             ' 

/ 



/B- 

T      {2^>C'e7%<^-yi^  /G!^c^'i-ly^-el^^'^^-' 

3i>  (>2\S-0 

j 
^S27 

-Z> 

^!2<:<:w?-«-t-»-£-i^/^^-^^>cz-<^v2i-^ 

XX 

(y 

^c5^(i^^^'Se,-ys-^7<-i^->-i.ta^  C;tj;6-<;^^S-(^  •^;!'W 

,, 

/Sg'OJ 

e^ 

// 

K^.    li^^'S«,-y'7^>-l,<!-^f^-<xi^/^-t^i<'^X-<l.<^':i^, 

'        ^(?<7 

! 

/Qy 

/s 

/2<;»-Z2</ /^UfS^-otx'Tjz-A^S^ 

^OO 

j^ 

/r 

/^C»-Z^ ->^,^^<Z,<^-(d^ 

ysoo 

B- 

1/ 

CXi^t^ 

Z.¥'^¥  2/ 

^ 

z^ 

3/sS.   y/ 

^ 

^7 

ya2s  // 

c7vi^ 

2f 

t:(4*<^-<^j^.Z5-ty             fc^^Z-^z.  J /.J 

/jT/^    ^'jT 

J7 

37- 
S3 
3^ 

/20 

J7 

s/ 

J7 

//^ 

a 

3C 

JO. 

^f 

^eXe^  Ox^z.e.-y<-^c^^ 

■J'/jT    ^i' 

JO 

S/ 

'^^..e.i.^^AX- 

^JT   V^ 

j: 

SZ 

C^^C^'>'yT--i.'t-Z'C.^d-Z^>-'e!l.^C^^'l,*.-e^   C^rC^b^e-'y-z-^^^^ 

22S 

^ 

S3 
S^ 
SS 

,^&^£-t^L.C^L<x^  C^&jJ^/c-Tj-i^tt^ 

• 

e^  ' 

u: 

/    JT^ 

X 

■^7 

fe^^^^z-Zfel,^.^^ 

7 

/B- 

sf 

/Le^gX^  C,<i,.?!^iZ^tU^^X't^^t^-c.<i^^^ 

J  ^2  ^O 

X 

^7 

Co 

e 

X 

20 

e 

(,2- 

tLZA-^iyV-C-Vy   (-'O-t^co^^j^-yT-xZ^-yu^ 

^/3  St2 

1 

2fc>32  f'/ 

2f(?3x  r-^ 

484.  The  accounts  contained  in  the  final  trial  balance,  illustration  85,  are  en- 
tered in  the  order  in  which  they  appear  in  the  preceding  pages,  to  correspond  with 
the  order  in  which  they  are  usually  taken  from  the  ledger.  (1[458)  Illustration  86 
shows  the  same  accounts  arranged  in  groups — one  for  the  trading,  another  for  the  pro- 
fit and  loss,  and  the  third  for  the  resource  and  liability  statements,  in  the  order  in 
which  they  usually  appear  in  those  statements.  This  is  sometimes  done  to  facilitate 
the  preparation  of  the  statements,  and  is  valuable  in  assisting  the  student  to  dis- 
tinguish between  the  various  accounts.  Note  that  the  merchandise  inventory  ac- 
count appears  not  only  in  the  trading  statement,  but  also  in  the  statement  of  resources 


FINAL  TRIAL  BALANCE 


1^1 


and  liabilities.    The  statement  in    which   each    account    appears    is    also    indi- 
cated by  letters  on  the  left-hand  margin  of  the  trial  balance  in  illustration  85. 

484a.  Observe  the  following  distinctions  at  the  time  of  closing  the  books 
between  the  merchandise  inventory  taken  at  the  close  of  the  preceding  fiscal  period 
and  the  inventory  taken  at  the  close  of  the  present  fiscal  period: 

(1)  That  the  inventory  of  the  preceding  period  is  the  only  one  which  at  the 
time  of  closing  the  books  is  shown  on  the  face  of  the  ledger  and  in  the  trial  balance, 
and  that  it  is  used  in  making  up  the  trading  statement,  but  that  it  does  not 
appear  in  the  statement  of  resources  and  liabilities. 

(2)  That  the  inventory  taken  at  the  close  of  the  present  period  does  not 
appear  in  the  trial  balance,  and  will  not  be  shown  on  the  face  of  the  ledger  until 
after  the  closing  entry  for  the  period  has  been  posted,  but  that  it  does  appear  in 
the  statement  of  resources  and  liabilities. 

(3)  Note  in  other  words  that  while  both  inventories  appear  in  the  trading 
statement,  one  appears  in  the  trial  balance  but  not  in  the  statement  of  resources  and 
liabilities,  and  the  other  appears  in  the  statement  of  resources  and  liabilities  but 
not  in  the  trial  balance. 


Illustration  86. 


TRIAL  BALANCE,    JANUAHY  31,    19        ,    F.   A.   RAYMOND. 


T^^L 


T=>yL 


Cash 

2444.21 

Accounts  Receivable 

3667.50 

Notes  Receivable 

900. 

Real  Estate  Investment  a/c 

9100, 

Fumitiu-e  &  Fixtures 

392.50 

Delivery  Equipment 

413.50 

Inaurance  -  Unexpired  Premiums 

82,50 

F.  A.  Raymond,  Personal 

200, 

F.  A.  Raymond,  Capital 

15807. 

Notes  Payable 

1500. 

Accounts  Payable 

4527.22 

Mdse.  Inventory 

7516.45 

Purchases 

2156.47 

Warehouse  Labor 

120. 

Warehouse  Supplies 

61.35 

Sales  Discount 

171.64 

Sales 

7025.11 

Purchase  Discount 

173.51 

Selling  Expense 

315.20 

Freight 

65.40 

Administrative  Expense 

275. 

General  Expense 

85.56 

Insurance  Expense 

7.50 

Real  Estate  Expense  &  Income 

31.06 

Furniture  &  Fixtures  Repairs  &  Renewals 

20. 

Interest 

7. 

29032.64 

29032.64 

142 


BOOKKEEPING   AND   ACCOUNTANCY 


COMBINED  TRADING  AND   PROFIT  AND   LOSS  STATEMENT. 

485.  Full  instructions  for  preparing  the  trading  statement  and  the  profit  and 
loss  statement  separately  are  given  in  preceding  chapters,  beginning  vnih  ^233  and 
1435.  Illustration  87  shows  the  trading  and  profit  and  loss  statements  combined 
into  a  single  statement,  including  the  distribution  of  the  net  profit. 


Illustration  87. 

TRADING  AKD  PROFIT  &   LOSS  STATEMENT,  JANUARY  31,  19 


F.  A.  RAYKOKD. 


Returns 


27.40 
40.16 


Gross  sales 

Less   Rebates  and  allowances 

Goods  returned 
Deduct  Sales  disccunts 
Ket  returns  from  sales 

Costs 

Inventory,  December  31,  19 

Purchases 

Less   Rebates  and  allowances 

Goods  returned 
Add    Warehouse  supplies 

Warehouse  labor 
Total  cost  of  purchases 
Deduct  Purchase  discounts 
Net  cost  of  purchases 
Less  Inventory,  January  31,  19 

Cost  of  merchandise  sold 

Gross  trading  profit 

Esrpenses 

Selling  expenses  Sales  Ex.  a/c 

Sample  cases 

Advertising  and  preraiuraa 

Delivery  charges 

Salesmen's  salaries  and  commissions 

Traveling  expenses 

Miscellaneous 

Total 

Freight 
Administrative  expenses        Add.  Ex.  a/c 

Office  supplies 

Legal  advice 

Salaries  office  help 

Manager's  salary 

Miscellaneous 
General  ejopenses 

Light  and  heat 

Rent 

Miscellaneous 
Insurance 
Interest 

Real  estate  repairs  and  renewals 
Furniture  and  fixtures  repairs  and  renewals 
1       Net  profit  for  month  to  F.  A.  Raymond's  capital  a/c 


7124.36 


35.14 
64.13 


3224.03 


67.56 


20..15 
66.65 
35. 

130. 
30.90 
32.50 

315.20 
65.40 

17.50 
10. 
92.30 
150. 
5.20 

15.31 
65. 
5.25 


99.27 

7025.11 

171.04 

1 

1 

6855:47 

7516.45 

3156.47 

61.35 

120.      .1 

10854.27 1 

173.51 

"10660.76 

5836.47 

4844.29 
^2009.18 

380.60 

275. 

85.56 

7.50 

7. 

J 

1           31.06 

20. 

806.72 

1202.46 

PROFIT     AND    LOSS    STATEMENT 


143 


485a.  Review  'previous  instructions  for  preparing  trading  and  profit  and  loss 
statements,  and  then  prepare  a  combined  trading  and  profit  and  loss  statement 
from  the  trial  balance,  as  shown  in  illustrations  85  and  86,  using  illustration  87  as  a 
model,  and  present  for  approval. 

Closing  the  Ledger  by  a  Single  Journal  Entry. 

486.  Illustration  88  shows  the  journal  entry  made  up  from  the  final  trial  bal- 
ance and  the  inventories  at  the  date  of  closing,  to  close  all  accounts  in  the  ledger  ex- 
cept those  showing  resources  and  habilities,  including  reserve  surplus,  undivided 
profits  and  ownership  accounts.  This  journal  entry  is,  in  fact,  the  journal  entries 
shown  in  illustrations  42,  66  and  71,  combined  into  a  single  journal  entry. 


Illustration 


i/^^'yz^K.ifC4.^fS/,   /f 


J^aA^     .        


/  /3  J-/ 


&k&i£^am^i£^^^^^kdb?^ 


i'L^yl.e-A.n<.d^<z,(a.^v-r- 


j&A^^&i.cdJr 


M^h&ki^^.mM 


^i2i^2^Kj^#««'5-i.i<^usi^^^;  /'^:-<'vj:&4«^-^^;<W'-<^Vzlt- ^ 


J /si  -y/ 
ys/C  ^S 

G/   SjT 
/2  0 

/■;/(>¥ 

_  J/S    2-0 

t_-fi£^^. 

7 
?^,<?^_ 

_  ^A 


LZO_Z\  ^C' 


486a.  When  a  single  journal  entry  is  made  to  close  the  ledger,  as  shown  in  the 
above  illustration,  neither  a  trading  nor  a  profit  and  loss  account  is  opened  in  the 
ledger.  This  method  has  become  the  rule,  as  the  opening  of  the  accounts  mentioned 
is  consideied  to  be  unnecessary. 

4866.  Accounts  in  the  ledger  may  he  closed  by  transferring  the  differences 
shown  by  the  various  trading  and  loss  and  gain  accounts  to  the  "trading"  or  the 
"profit  and  loss"  accounts  after  the  old  method  of  closing  the  ledger.  When  this 
method  is  followed,  the  trading  and  profit  and  loss  accounts  should  be  opened.  This 
method  is  obsolete,  however,  and  is  not  approved  by  accountants. 


144 


BOOKKEEPING   AND   ACCOUNTANCY 


486c.  The  illustrations  underneath  show  the  form  of  the  profit  and  loss  siate- 
ment  when  the  net  profit  is  divided  between  partners  equally,  and  the  part  of  the 
journal  entry  which  distributes  the  net  profit  to  the  proper  accounts.  It  is  assumed 
that  F.  A.  Raymond  and  John  Patton  are  equal  partners,  each  entitled  to  one-half 
of  the  net  profits. 


I LLUBTBATION  89. 

Nat  profit  for  the  month 
F.  A.  Raymond's  capital  a/c,  l/2  profit, 
John  Patton' 3  capital  a/o,  l/2  profit. 


601.23 
fini.2Z 

1202.46 

1202.45 

1202.46 

ii 

In  the  journal  entry,  instead  of  "  F.  A  Raymond  Capital,  for  net  profit,  $1202.46, ' ' 
write  the  following: 


iLLUSTaATION  90. 


y^^^'/Sx^/rTK^^tli/Ca^,  y^.         '/z.  .^ii'i-o^^c^  .^St^  . 


-j C<f4-!t^/S4Zrrt^Ca^.  ya^,      ^^ 


486d.  Assuming  that  the  business  was  conducted  by  a  corporation,  illustra- 
tions 91  and  92  show  the  net  profit  distributed  on  the  statement  to  dividend,  sur- 
plus, reserve  and  undivided  profits  accounts,  with  the  necessary  changes  in  the 
journal  entry  to  correspond. 


Illustration  91. 

Net  profit  for  the  month 
Dividend  3^  on  |15000 
Surplus 

Reserve  for  depreciation 
Undivided  profits  ' 


' 

1202.46 

450. 

600. 

100. 

K2-4.fi 

1202.461 

1202.46 

1 

Illubtbation  92. 


486e.  The  principal  reasons  for  closing  the  various  trading  and  profit  and  loss 
accounts  in  the  ledger  at  the  close  of  the  fiscal  period  are,  as  stated  in  ^247  and  1(447 : 
(a)  to  indicate  the  close  of  a  business  period  and  (6)  to  eliminate  them  as  open 
accounts  in  the  ledger,  since  their  results  have  been  disposed  of  in  the  net  profit 
or  the  net  loss  for  the  period.  After  the  closing  journal  entry  is  posted,  the  ledger 
is  again  in  its  primal  condition,  showing  only  resources  and  liabilities. 


STATEMENT   OP   RESOURCES   AND    LIABILITIES 
STATEMENT  OF  RESOURCES  AND  LIABILITIES. 


145 


487.  After  the  trading  and  profit  and  loss  statement  is  completed,  the  state- 
ment of  resources  and  liabilities  is  prepared.  This  statement  is  made  up  from  the 
resources  and  liabilities  shown  on  the  trial  balance  and  the  inventories  of  resources 
and  Habilities.  Study  illustration  93  carefully.  Accountants  in  practice  usually 
make  the  statement  of  resources  and  liabilities  first,  and  then  find  what  the  net  pro- 
fit or  loss  should  be,  thus  making  the  profit  and  loss  statement  prove  the  statement 
of  resources  and  habilities,  although  this  would  seem  to  be  out  of  the  logical  order, 
because  it  is  apparent  that  the  net  profit  or  loss  affects  the  resources  and  habilities 
rather  than  that  the  resources  and  liabilities  affect  the  net  profit  or  the  net  loss. 

487a.  The  resources  are  arranged  in  two  gioups,  one  including  the  current 
resources  arranged  in  the  order  of  their  availability  for  the  payment  of  bills,  and  the 
other  including  the  more  permanent  investments,  which  are  designated  as  fixed 
resources.  The  order  in  which  the  accounts  showing  fixed  resources  appear  is 
without  reference  to  their  importance  in  paying  bills. 

Illustration  93. 


c4^^^J 


'S/,/^  ^:^'XZ^^:Zy^7^n-<n-i-<^ 


"W 


ivyy  L2/ 
foo   I 


r2 


f/ffO 


^r 


I /J!    \f^ 


^Lf^U^ 


2ZS'Ji>  i>/ 


/soo 


u^uy 


u. 


2.2- 


/sro7. 


146  BOOKKEEPING   AND   ACCOUNTANCY 

4876.  The  current  liabilities  are  likewise  given  precedence  in  the  order  of  their 
importance.  Other  liabilities,  such  as  bonds  or  mortgages  payable,  which  are  more 
remote  as  to  the  time  of  payment,  are  frequently  designated  as  "fixed  liabilities," 
which  usually  appear,  however,  in  connection  with  the  business  of  a  corporation, 
and  therefore  are  not  included  in  the  illustration. 

488.  The  difference  between  the  total  resources  and  the  total  liabilities  shows 
the  7ict  resources  or  the  net  liabilities  of  the  concern,  which  must  equal  the  net  cap- 
ital or  the  net  insolvency  at  the  close  of  the  last  fiscal  period  plus  the  net  profit  or 
minus  the  net  loss  for  the  present  period. 

488a.  Observe  that  the  difference  between  the  total  resources  and  the  total 
liabilities  equals  the  net  resources,  which  represents  the  owner's  equity  or  owner- 
ship in  the  business  and  is  shown  by  the  amount  of  his  capital  at  the  beginning  of 
the  period  represented  in  the  statement  plus  the  net  profit  for  the  period,  or  minus 
the  net  loss  for  the  period.  The  illustration  shows  the  personal  account  of  the 
proprietor  deducted  from  his  investment,  the  difference  equaling  the  net  resources, 
i.  e.,  the  net  capital. 

4886.  The  net  capital  represented  in  the  ownership  accounts  may  properly 
be  classed  as  a  secondary  liability  of  the  concern.  After  all  creditors  have  been 
paid,  the  capital  accounts  show  ivhat  is  left  for  the  owner;  but  to  say  that  the  capital 
of  a  concern  is  a  liability  would  be  equivalent  to  saying  that  the  owner  of  the  busi- 
ness owes  himself  the  amount  of  his  net  capital.  Read  chapters  on  ownership  ac- 
counts, 1155  and  ^[69. 

Exercises  in  Preparing  Combined  Til-vding  and  Profit  and  Loss  Statements 
AND  Statements  of  Resources  and  Liabilities. 

489.  Prepare  a  trading  and  profit  and  loss  statement  and  a  statement  of 
resources  and  liabilities  from  each  of  the  trial  balances  shown,  and  present  for 
approval.  Example  two  is  almost  an  exact  duplication  of  the  trial  balance  shown 
in  illustration  85,  except  that  the  business  is  owned  by  a  firm  instead  of  a  single 
proprietor;  therefore,  illustrations  87,  88,  90  and  93  may  be  used  as  models  in  the 
preparation  of  the  statements  and  the  journal  entry. 

(1)  Prepare  a  trading  and  profit  and  loss  statement,  including  detailed  in- 
formation relating  to  purchases  and  sales  (see  ^242a-2  and  3;  also  ^242a-8),  with 
journal  entry  to  close,  and  a  statement  of  the  resources  and  liabilities  shown  on 
the  trial  balance  (illustration  85),  including  the  merchandise  inventory  of  January 
31  of  $5836.47. 

(2)  The  trial  balance  of  Hicks  &  Anthony  for  the  year  ending  December  31, 
when  the  inventory  of  the  merchandise  on  hand  at  that  date  was  $9524.15,  showed 
the  following  debits  and  credits : 


ANALYSIS   SHEETS 


147 


Accounts  receivable 

Accounts  payable 

N.  W.  Hicks  capital  a/c 

N.  W.  Hicks  personal  a/c 

A.  R.  Anthony  capital  a  'c 

A.  R.  Anthony  personal  a/c 

Notes  Receivable 

Notes  Payable 

Cash 

Purchases 

Sales 

Inventory 

Warehouse  supplies 

Warehouse  labor  for  the  year 

Purchase  Discounts 

Sales  Discounts 

Sales  Expense 

Administrative  Expense 

General  Expense 

Insurance  (Unexpired  Premiums) 

Insurance  Expense 

Interest 

Real  Estate  and  Building 

Real  Estate  Expense 

Furniture  and  Fixtures 

Delivery  Equipment 


7946.27 


1200. 

1150. 
1690. 

916.36 
12618.35 

19444.50 

221.50 

1560.45 

1425.80 

2436. 

1833.75 

721.60 

61.50 

528.37 

72.12 

6500. 
114.50 
286.90 
554.32 


6423.19 
11174.93 

11174.92 

2346.12 

29341.37 

821.76 


61282.29 


61282.29 


ANALYSIS  SHEETS. 

490.  Analysis  sheets  have  been  referred  to  a  number  of  times  in  the  preceding 
pages.  "Analysis  sheet"  is  a  general  term  applied  to  any  working  paper  used  for 
the  purpose  of  analyzing  or  separating  the  various  items  appearing  in  an  account. 
They  have  no  set  form  or  arrangement,  but  may  be  designed  and  ruled  up  for  whatever 
purpose  desired.  An  analysis  sheet  may  contain  any  number  of  columns  required 
for  the  purpose  intended. 

490a.  Two  forms  of  an  analysis  sheet  are  shown — one  separating  into  groups 
the  various  items  shown  in  a  single  account  and  the  other  showing  the  cumulative 
additions  to  the  items  shown  in  the  account  month  by  month.  These  forms  can 
be  used  to  analyze  any  account,  as  they  admit  of  expansion  to  any  degree  necessary . 


148 

Illusiration  95. 


BOOKKEEPING   AND   ACCOUNTANCY 


^'^^<:^?^M^ez/' i 


?7-z.U.,i.^.££c^- 

/ 

/ 

z 
/ 

2. 
/ 

3.S- 

0  o 

ss 
so 
s-s 

zs- 

3 

3 

V 

-      / 

s-o 

J-0 

z 

/ 

7S- 

/  3 
/  O 

ZS" 

/J 

/  0 
9:^ 

/  0 

70 

Z-    frr 

OS- 

/  f 

7" 

2?_  £6><y  .z<:.^Ja^  ^ 

4906.  The  illustration  on  the  left  shows  a  section  of  the  general  expense  account 
for  the  month.  The  illustration  on  the  right  shows  the  items  separated  into  groups. 
These  groups  might  be  extended  indefinitely,  if  desired,  with  a  separate  column  for 
each  particular  item.  The  same  form  could  be  used  for  the  analysis  of  any  account 
for  any  length  of  time,  the  number  of  columns  in  the  analysis  sheet  being  deter- 
mined by  the  number  of  groups  into  which  the  items  are  to  be  divided. 


Illustration  ' 


MALYSIS  SHEET 


Illustrating  General  Ezpense  Account. 


'       Total 

Total 

Items 

Month 

Montn 

two  mos. 

Month 

three  mos . 

of  Jan. 

of  Feb. 

to  Feb.   28 

.of  Mch. 

to  Mch.   31 

Coal 

7.00 

11.20 

18.20 

10.00 

28.20 

Vehicle  License 

4.50 

4.50 

4.50 

Electric  Light 

2.10 

2.05 

4.15 

1.80 

5.95 

Gas 

6.40 

9.00 

17.40 

7.50 

24.90 

Stationery  &  Printing 

11.50 

6.00 

17.50 

12.50 

30.00 

Postage 

5.00 

6.00 

11.00 

7.50 

18.50 

Cleaning  office 

2.50 

2.50 

5.00 

2.50 

7.50 

Repairing  chairs 

1.75 

1.75 

.25 

2.00 

Rent 

90.00 

90.00 

180.00 

90.00 

270.00 

Telephone 

3.75 

4.15 

7.90 

3.75 

11.65 

Telegrams 

1.20 

.85 

2.05 

.60 

2.65 

City  Directory 

6.00 

6.00 

6.00 

Street   car  tickets 

2.25 

2.25 

2.00 

4.25 

Brooms  &  Mops 

1.50 

1.50 

1.50 

Soap 

2.50 

2.50 

\'% 

Cr.    Sale   of  carbon  paper 

1.00 

1.00 

143.70  X 

137.00 

280.70  X 

138.40 

419.10  I 

Items  marked  "x"  would  agree  with  balance  of  general  expense  as  shown  by  the  trial 
balaxices  of  these  dates. 


PREPARING  ANALYSIS  SHEETS  149 

490t .  The  foregoing  cut  illustrates  the  analysis  sheet  used  to  show  the  cumula- 
tive cost  of  the  various  items  entering  into  the  general  expense  account  from  month 
to  month.  These  sheets  are  generally  of  twenty-four  columns,  each  ruled  as  shown, 
and  are  kept  in  a  binder.  Notice  that  the  items  entered  in  the  "irst  left-hand 
column  show  all  details  of  the  charges  to  the  expense  account  during  the  month 
of  January.  Where  there  are  many  items  in  an  account,  these  details  are  first 
ascertained  by  using  an  analysis  sheet  like  the  one  shown  in  illustration  95.  The 
total,  $143.70,  should,  of  course,  agree  with  the  balance  of  the  account  shown  in 
the  trial  balance  for  that  month.  The  next  column  shows  February  expenses, 
column  three  showing  the  total  for  the  two  months  ending  February  28,  $280.70, 
which  should  agree  with  the  general  expense  balance  in  the  trial  balance  for 
February,  and  so  on  throughout  the  year.  Note  the  figures  in  red  in  the  month  of 
February.  They  appear  as  a  credit  to  the  account  in  the  ledger  for  a  small  sale 
of  carbon  paper,  and  indicate  the  method  of  disposing  of  such  items. 

Exercises  in  Preparing  Analysis   Sheets 

The  following  illustration  shows  the  items  appearing  in  the  debit  column  of  a 
general  expense  account  for  three  months.  Prepare  two  analysis  sheets,  one  show- 
ing the  various  items  separated  in  groups  for  one  month,  similar  to  illustration  95, 
and  another  showing  the  cumulative  results  of  the  account  for  the  three  months, 
similar  to  illustration  96. 

(1)    The  expense  account  of  Smith  &  Son  shows  the  following  items: 

April  1.  Coal  bill,  $16.  -  -  4.  Electric  light  bill,  $9.63.  -  -  10.  Gas  bill, 
$6.15.  — 14.  Cleaning  office  and  windows,  $3.50.  — 16.  Telephone  bill,  $12.50. 
-  -  17.  Telegrams,  $1.75.  -  -  18.  Stationery  and  printing,  $3.50.  -  -  20. 
Postage,  $10.  --21.  Postage,  $3.00.  --27.  Stationery,  $9.60.  --30. 
Cleaning  office  and  windows,  $3.50.     --30.    Telegrams,  $2.75.  — 30.    Rent,  $85. 

May  2.  Gas  bill,  $6.75.  --4.  Telegrams,  $1.30.  -- 8.  Electric  light  bill, 
$11.50.  --9.  Postage,  $2.60.  — 12.  Telephone,  $12.50.  — 18.  Stationery 
and  printmg,  $7.75.  —  19.  Long  distance  telephone  charges,  $3.20.  —  25. 
Vehicle  license,  $6.00.     -  -  31.     Rent,  $85. 


June  5.     Electric  light  bill,  $9.50;  gas   bill,  $3.20.     -  -  10.      Postage, 
'-15.    Cleaning  office,  $2.40.    — 17.    City  directory,  $4.00.    — 20.    Broomsand 
janitor's  supplies,  $3.35.     — 23.     Repairing  typewriters,  $7.50.     — 25.     Cleaning 
rugs  and  carpets,  $8.25.     —  30.     Rent,  $85. 

AMERICAN,  OR  CONTINENTAL,  FORM  OF  TRADING  STATEMENT. 

491.  The  trading  and  profit  and  loss  statement  shown  in  illustration  (97) 
differs  in  its  arrangement  from  the  report  form  of  the  same  statement  shown  in 
illustration  87,  although  it  is  prepared  from  exactly  similar  data  and  for  the  same 
purpose.  It  is  variously  known  as  the  American,  the  Continental,  and  the 
"  technical  "  form  of  statement,  and  is  the  form  usually  preferred  by  accountants. 


150 


BOOKKEEPING    AND    ACCOUNTANCY 


Illubtilation  97. 


Tradiiig  and  Pro.fit  &  Loss  Statement. 

Year  ending 


DEBITS. 
Merchandise  on  hand  Dec.  31,  19 

-add- 
Purchases  fol*  year 

Less  rebates  and  allowances 
Boxing,  packing  and  shipping 
Warehouse  labor  and  expenses 


per  inventories 


125,000. 
__15,000. 


-deduct- 
Merchandise  on  hand  Dec.  31,  19   ,  per  inventories 
Cost  of  merchandise  sold 


Administrative  expenses  - 

Salaries  of  officers 

Salaries  of  office  help 

Office  supplies 

Postage  &  stationery 

Miscellaneous 
Selling  expenses  - 

Salesmen's  salaries 

Salesmen's  commissions 

Salesmen's  traveling  expenses 

Samples,  sample  cases 

Premiums 

Advertising 
Rent 

Insurance 
Taxes 
Bad  debts 
Repairs  and  renewals  to  buildings 


Disposition  of  profit  - 

Reserve  for  items  in  inventory  not  staples 
Reserve  for  doubtful  accounts 
Reserve  for  depreciation  of  buildings 
Interest  on  Jones'  capital  10,000  1  yr.  at 
Interest  on  Brovm's   "    20,000  1  yr.  at 
1/3  profit  to  Jones'  capital  a/c 
2/3   "     "  BroT/n's   »•     " 


2,000, 
1,600. 

600. 

500. 

150. 

1,000. 
1,000. 
1,000. 
1,000. 

500. 

500. 
.1,200. 

400. 

200. 


25  000  00 

00       ' 

00  110  000  00 

600  OOi 

jj--   300  OOj 

I 135  900  00 

'-65  000  OoJ 

70  900  00; 

isd   700  00 


00 
00 
00 
00 
00 


4  850  00 


5  000  00 


1  800  00 
650  00 


•800 

15  740 


■2a-JB4Q 


1,000. 

1,000. 

740. 

t  600. 

t       1,200. 

3,733. 
7,466. 


m 


2  740  00 


1  800  00 


11  200 1  00' 
jj=15  740  00 


STATEMENTS 


151 


John  W.  Brown  Merchandise  Company. 


December  31,  19 


^  CKEDIT3. 

Gross  sales 
Less  - 

Eebates  &  allowances 
Peturned  sales 
Discovmts  on  sales 
Net  sales 


100  000!  00 


1,000.00 
1,200.00 

2,100.00   4  300'  00 
95  700  00' 


Gross  profit  on  trading  hrought  down 

Purchase  discovints 

Sale  of  old  material 

Interest  on  accounts 

Warehouse  rental 

Dividends  received  on  accounts  written  off  as  bad 


Net  profit  (year's  business)  brought  down 


95  700,  00 

24  800 '  00 

3  000  00 

400  00 

100  00 

500  00 

40  00 


28  840  00 
r  15  740  00 


152 


BOOKKEEPING    AND    ACCOUNTANCY 


Illustration  98. 


Statement  of  Resources  &  Liabilities. 
Year  ending 


RESOURCES. 
Cash  on  hand 

Cash  in  bank  (First  National) 
Postage  on  hand 
Mdse  -  per  inventories  (at  coat) 

Less  reserve  for  items  not  staples 
Notes  receivable 
Accrued  interest  on  notes 
Accounts  receivable 
Due  in  30  days 
Due  in  60  days 
Past  due  (Good) 
Past  due  (Doubtful) 
Total 

Less  reserve  for  doubtful  accounts 
Accrued  warehouse  rental 

Total  current  resources 
Supplies  on  hand  -  per  inventories 
Unexpired  insurance  premiums 
Advances  to  agents 
Property  &   equipment 

Furniture  &   fixtures 
Delivery  equipment 
Real  estate 

Buildings  (subject  to  mortgage  per 
Total 

Less  reserve  for  depreciation  on  bidg. 
Total  resources 


65,000,00 
1,000.00 


6,000.00 
30.00 


15,000.00 

5,000.00 

2,000.00 

_„.1,400.00 

23,400.00 

1,000.00 


700o00 

1,600.00 

10,000.00 

c  0  nt  ra  ] 14^  8  00 , 0_Q. 

27,100.00 
740.00 


100  00 


2  500 

15 

64  000 
6  030 


00 
00 

00 

00 


26  360 


124  495 


00 


00 


STATEMENTS 


153 


John  W.   Brown  Merchandise  Company. 


December  31,   19 


LIABILITIES. 
Overdraft  -  Second  Wat'l  Banlc 
Notes  payable  -  bank  loans' 
Notes  payable  -  mdse.  notes 
Accrued  interest  on  notes  &  mtg. 
Accrued  commission 
Aecrued  taxes 
Accounts  payable 


Total  current  liabilities 
Mortgage  payable  (on  building  per  contra) 

Total  liabilities 
J.  Jones  -  Investment 

Add  interest  on  capital 
Add  1/3  net  profit 

B.  Brown  -  Investment 

Add  interest  on  capital 
Add  2/3  net  profit 

Total  liabilities  &  capital 


30,000.00 
15,000.00 


340 

45  000 

355 

1  000 

300 

26  500 


73  495 
8  000 


00 

00 

00 
00 
00 
00 


81  495 

10,000.00 

600.00  !■ 

3,753.33  14  333 


20,000.00  ' 

1,200.00 
7.466.67  ,;  28  666 


124"4^ 


00 
00 


33 

67 
00" 


154  BOOKKEEPING    AND    ACCOUNTANCY 

While  the  amounts  differ,  and  there  are  several  items  included  in  illustration  97 
which  are  not  found  in  illustration  87,  a  careful  comparison  will  reveal  the  simi- 
larity between  the  statements.  The  principal  differences  are  noted  in  the  follow- 
ing paragraph. 

491a.     The  principal  differences  are  as  follows: 

(1)  The  debits  appear  on  one  side  and  the  credits  on  the  other  side  of  the  state- 
ment 97,  corresponding  with  the  two  sides  of  an  account,  instead  of  the  debits 
appearing  under  the  credits  as  shown  in  illustration  87. 

(2)  In  illustration  97,  sales  discounts  are  considered  as  decreasing  returns  from 
sales  (^226a,  ^231a),  while  purchase  discounts  are  considered  as  showing  a?i  income 
derived  from  having  the  capital  available  to  prepay  bills.     (2206,  ^225&) 

(3)  Observe  that  several  credit  items  are  sho^vn  in  the  profit  and  loss  section 
which  are  not  shown  in  illustration  87,  such  as  "Sales  of  old  material,  "  "Interest  on 
accounts,"  "Warehouse  rental,"  "Dividends  received,"  etc. 

(4)  Note  that  in  the  disposition  of  the  net  profit,  reserves  are  set  apart  for 
depreciation  in  the  inventory,  for  doubtful  accounts  and  for  depreciation  of  buildings. 

(5)  Note  also  that  deductions  for  the  interest  on  each  partner's  capital  are 
made  before  the  division  of  profits  between  the  partners  is  made. 

492.  The  statement  of  resources  and  liabilities  shown  in  illustration  98  is 
similarly  known  as  the  American,  the  Continental,  or  "analytical"  form  of  that 
statement.  It  contains  results  that  are  exactly  similar  to  those  as  shown  in  the 
statement  of  resources  and  liabilities  in  illustration  93.  Like  the  statement  shown 
in  illustration  97,  this  form  is  preferred  by  accountants. 

EXPLANATION  OF  OTHER  ACCOUNTS. 

493.  In  addition  to  the  accounts  explained  in  the  preceding  pages,  there  are 
many  others  required  in  various  lines  of  business.  A  number  of  these  accounts 
are  explained  in  more  or  less  detail  in  this  chapter. 

SHIPMENTS  AND   CONSIGNMENTS. 

494.  Goods  are  frequently  shipped  by  one  person  to  another  to  be  sold  ' '  on  com- 
mission" by  the  second  party,  who  acts  as  the  representative  or  agent  of  the  first 
party. 

495.  The  party  making  the  shipment  is  known  as  the  consignor,  and  he  keeps  a 
record  of  the  shipment  in  an  account  known  as  a  "shipment"  account. 

496.  The  party  receiving  the  shipment  is  known  as  the  consignee,  and  he  keeps 
an  account  of  the  goods  received  under  the  name  of  "consignment"  account.  The 
consignee  does  not  purchase  the  goods;  they  still  belong  to  the  consignor.  When 
the  goods  are  shipped,  they  are  accompanied  by  an  "invoice  of  shipment."   (1[5S8.) 


SHIPMENTS   AND    CO:;SIGNMENTS  155 

497.  After  the  consignee  sells  the  goods,  he  deducts  a  certain  percentage  on  the 
total  sales  as  payment  for  his  services,  which  is  known  as  his  coynmission,  and  also 
for  any  other  charges  which  may  have  been  incurred  in  effecting  the  sale  of  the  goods. 
The  remainder,  which  is  known  as  the  "net  proceeds,"  belongs  to  the  consignor. 

498.  According  to  the  laws  of  agency,  the  consignee  becomes  indebted  to  the  con- 
signor for  the  net  proceeds  of  the  goods  as  soon  as  they  have  been  sold,  hence  the 
net  proceeds  should  be  remitted  or  credited  at  once  to  the  consignor  by  the  consignee. 

499.  A  statement  known  as  an  "account  sales"  is  rendered  by  the  consignee  to 
the  consignor,  showing  in  detail,  (1)  the  sales,  (2)  the  charges,  and  (3)  the  net  pro- 
ceeds. An  account  sales  may  be  rendered  when  the  goods  are  but  partly  sold,  if 
so  desired.     (1J589) 

500.  The  object  of  shipment  accounts  is  to  record  our  deahngs  with  "agents" 
or  "  commission  merchants  "  to  whom  we  ship  goods  for  sale  on  commission, — that  is, 
for  sale  for  our  account  and  at  our  risk. 

501.  The  object  of  consignment  accoimts  is  to  record  our  dealings  with  those 
who  ship  goods  to  us  to  be  sold  for  their  account  and  at  their  risk. 

502.  Shipment  and  consignment  accounts  as  they  are  shown  in  this  chapter  are 

intended  to  familiarize  the  student  with  the  principles  of  debit  and  credit  involved 
and  to  show  the  manner  in  which  a  few  shipment  and  consignment  accounts  may  be 
kept  in  the  books  of  an  ordinary  mercantile  business.  They  are  not  intended  to 
illustrate  the  best  methods  of  keeping  these  accounts  in  a  regular  shipping  or  com- 
missi :in  business,  which  will  be  fully  illustrated  and  explained  in  the  special  commis- 
sion set  accompanj/ing  this  work. 

SHIPMENT  ACCOUNTS. 

503.  The  record  of  a  shipment  is  kept  in  the  books  of  the  consignor  under  the 

title  of  "Shipment." 

504.  There  are  two  general  methods  of  keeping  shipment  accounts.  One  is  to 
open  a  separate  account  for  each  shipment,  adding  the  name  of  the  party  to  whom 
the  shipment  is  made,  for  instance,  "Shipment  to  Wm.  F.  Day  &  Sons,  Chicago." 
Where  more  than  one  shipment  is  made  to  the  same  party,  they  may  be  numbered 
as  No.  1,  No.  2,  etc.  Another  method  is  to  open  a  general  "  goods  on  consignment" 
account,  to  which  all  the  items  relating  to  the  various  shipments  are  credited  and 
debited,  with  a  separate  account  with  each  shipment  entered  as  a  memorandum 
account  in  a  special  book  kept  for  that  purpose.  The  last  method  does  not  differ 
from  the  first  method,  except  that  it  shows  in  one  account  the  same  results  that 
Vv'ould  be  shown  in  a  number  of  accounts  under  the  first  method. 

505.  The  object  is  to  ascertain  the  amount  gained  or  lost  on  our  different  ship- 
ments of  goods  to  others  for  sale  on  commission.  When  account  sales  are  received 
for  but  part  of  the  goods  shipped,  in  closing  the  shipment  account  those  remaining 


156 


BOOKKEEPING   AND   ACCOUNTANCY 


unsold  in  the  hands  of  the  consignee  are  treated  as  an  inventory  balance,  under  the 
designation  "Goods  on  consignment,"  exactly  as  in  a  merchandise  account,  until 
an  account  sales  for  the  remainder  of  the  shipment  is  received. 

506.  When  goods  are  shipped  on  consignment,  they  are  usually  entered  by  the 
shipper  on  the  invoice  of  shipment  at  cost  price,  although  sometimes  the  market 
or  selling  price  is  given.  Not  infrequently  in  such  lines  of  business  as  those  con- 
ducted by  stockmen,  dairymen,  fruit  growers  and  gardeners,  where  the  cost  price 
of  the  goods  shipped  is  not  definitely  known,  no  prices  whatever  are  given  on  the 
invoice  of  shipment.  Full  details  of  the  practices  common  among  shippers  and  com- 
mission merchants  are  given  in  the  commission  set  accompanying  this  work. 

506a .  It  is  not  unusual,  particularly  when  only  occasional  shipments  are  made, 
to  omit  opening  a  separate  ledger  account  for  them.  Instead  a  memorandum  record 
of  each  shipment  is  made  in  a  separate  shipment  Vjook  kept  for  that  purpose.  The 
record  is  a  practical  reproduction  of  the  invoice  of  shipment.  When  the  account 
sales  is  received  the  proceeds  are  credited  to  sales  accoimt,  the  same  as  a  regular 
sale.  At  the  same  time  a  record  of  the  proceeds  is  entered  in  the  shipment  book, 
v.hich  will  then  show  the  shipment  closed.  The  loss  or  gain  on  each  shipment  can 
be  ascertained,  if  desired.  When  this  method  is  followed,  the  value  of  the  goods 
for  which  account  sales  have  not  been  received  must  be  added  to  the  inventory  at 
the  time  of  closing  the  books,  being  designated  as  "  goods  on  consignment. "  This 
method  is  not  recommended,  as  it  is  liable  to  lead  to  confusion  and  inaccuracies  in 
the  trading  statement. 

Rule  for  Debiting  and  Crediting  Shipment  Accounts. 


507.     Debit  shipment  accounts  for  costs:  credit  for  returns. 


507a.     Debit  the  shipment,  under  an  appro- 
priate title,  for  all  costs. 


5076.     Credit  the  shipment,  under  an  appro- 
priate title,  for  all  returns. 


508.     The  various  applications  of  the  rule  are  as  follows: 


509.     Debit  shipments, — 

a.  For  the  invoice  (generally  the  cost) 
value  of  the  goods  shipped. 

b.  For  all  charges,  such  as  drayage,  insur- 
ance, freight  prepaid,  etc. 

c.  For  drafts  drawn  on  us  or  for  cash  ad- 
vanced by  us  on  account  of  the  ship- 
ment. 


511.  Observe  that  in  e ver}^  instance  the  ac- 
count  is  debited  for  the  cost  of  any- 
thing of  value  relating  to  the  shipment. 


510.     Credit  shipments, — 

d.  For  all  drafts  drawn  by  us  or  other  ad- 
vances made  to  us  on  account  of  the 
shipment. 

e.  For  all  returns  (proceeds)  when  account 
sales  are  received. 

/.  For  all  goods  returned  for  which  the 
shipment  had  been  previously  debited. 

(J.  For  insurance  received  on  goods  damaged 
or  destroyed. 

512.  Observe  that  in  every  instance  the  ac- 
count is  credited  for  the  returns  from 
anything  of  value  relating  to  the  ship- 
ment. 


SHIPMENTS   AND   CONSIGNMENTS  157 

513.  It  will  be  observed  that  a  shipment  account  is  similar  to  a  personal 
account  in  many  respects.  It  is  debited  when  the  agent  is  the  receiver  oi  anything  of 
value  from  us  and  is  credited  when  he  is  the  giver  of  anything  of  value  to  us.  The 
difference  between  the  two  sides  of  the  account,  however,  shows  a  loss  or  a  gain  to 
us,  instead  of  a  resom'ce  or  liability  as  in  a  personal  account. 

514.  Acting  on  the  principle  that  the  consignee  is  responsible  for  all  goods 
consigned  to  him  until  an  account  sales  has  been  received  or  a  settlement  made, 
many  bookkeepers  follow  the  practice  of  charging  the  personal  account  of  the  con- 
signee with  the  value  of  the  shipment  and  charges  until  an  account  sales  with  re- 
turns is  received,  when  the  personal  account  of  the  consignee  is  credited  to  close, 
with  the  difference  transferred  to  the  profit  and  loss  account  or  to  a  separate  account 
under  an  appropriate  title,  such  as  ''Shipment  Gains  &  Losses."  For  occasional 
shipments  this  method  is  approved. 

To  Close  Shipment  Account. 

515.  The  difference  between  the  two  sides  of  a  shipment  account,  before  an 
account  sales  has  been  received  and  returns  (proceeds)  credited,  will  show  a  balance 
which  is  a  resource;  after  an  account  sales  has  been  received  for  all  the  goods  shipped 
and  the  proceeds  credited  to  the  account,  the  difference  will  show  a  gain  or  a  loss — 
a  gain  if  the  credit  side  is  the  larger,  a  loss  if  the  debit  side  is  the  larger. 

516.  If  an  account  sales  is  received  before  all  the  goods  are  sold,  and  the 

shipment  account  is  credited  for  the  returns  (proceeds)  shown  by  the  account  sales 
for  that  portion  of  the  goods  which  has  been  sold,  the  difference  between  the  two 
sides  of  the  account,  after  the  account  is  credited  "by  i7iventory"  for  the  value  of  the 
goods  remaining  unsold  in  the  hands  of  the  consignee,  will  show  the  gain  or  the  loss 
on  the  goods  sold  and  reported  in  the  account  sales.  The  inventory  is  considered 
as  a  sundry  resource  inventory  described  in  1f468a,  the  shipment  account  being 
credited  for  the  amount. 

517.  To  close.  After  the  trading  statement  has  been  prepared,  shipment 
accounts  are  closed  by  a  journal  entry  made  up  from  the  trading  statement.  When 
the  closing  item  for  any  shipment  account  has  been  posted,  which  should  balance 
the  account,  rule  the  closing  lines  in  red  ink  and  enter  the  footings  in  black  ink. 

CONSIGNMENT  ACCOUNTS. 

518.  Consignment  accounts  (or  "commission  sales"  as  they  are  called  by 
most  commission  merchants)  differ  in  several  important  particulars  from  shipment 


158  BOOKKEEPING   AND   ACCOUNTANCY 

accounts.     When  an  agent  receives  goods  to  sell  on  commission,  he  does  not  in  any 

sense  buy  them,  and  when  he  expends  money  upon  them  in  paying  the  freight, 
drayage  or  other  charges,  and  debits  the  consignment,  he  does  so,  it  is  true,  with 
the  idea  that  the  property  received  is  "good  for  it,"  and  with  the  expectation  that 
he  will  get  his  money  back  from  the  proceeds  of  sales,  but  nevertheless  with  a 
knowledge  of  the  fact  that  the  consignor  (shipper)  is  personally  responsible  to  him 
(the  agent)  for  all  such  expenditures  and  also  his  charges  (commission,  etc.)  for 
selling.  On  the  other  hand,  the  consignor  looks  to  the  consignee  (agent)  as  being 
personally  responsible  to  him  for  the  proper  care  of  the  goods  while  in  his  possession, 
as  well  as  for  any  proceeds  that  the  shipment  may  return  to  him. 

519.  A  change  takes  place,  however,  in  the  relations  existing  between  the  con- 
signee and  the  consignor  the  moment  the  goods  are  sold.  Prior  to  that  time  the  con- 
signee is  not  responsible  for  the  value  of  the  goods,  nor  could  he  be  held  responsible 
for  any  loss  that  might  occur  so  long  as  he  exercises  ordinary  diligence  in  their 
care;  but  the  moment  the  goods  are  sold,  the  consignee  becomes  directly  indebted 
and  is  personally  responsible  to  the  consignor  for  the  value  of  the  goods  sold  after 
his  charges  have  been  deducted.  Even  if  he  sells  the  goods  on  credit  and  the  party 
to  whom  he  sells  should  fail,  he  is  still  held  responsible  to  the  consignor.  He  may, 
however,  deduct  a  certain  percentage  for  taking  such  risk,  unless  the  consignor 
instructed  him  to  sell  for  cash  only. 

520.  Consignment  accounts,  therefore,  in  reality  closely  resemble  personal 
accoimts  (^513) .  When  the  consignment  is  debited,  the  consignor  would  be  debited 
if  he  received  the  value  direct  from  the  consignee,  and  when  the  consignment  is 
credited,  the  consignor  would  be  credited  if  he  gave  the  consignee  the  value  direct. 
The  consignment  account,  therefore,  represents  the  consignor. 

521.  Consignment  accounts  are  not  debited  forthe  value  of  the  goods  received 

but  only  (a)  for  outlays  made  on  account  of  consignments,  such  as  freight,  drayage, 
advances,  etc.,  (b)  when  account  sales  are  rendered  for  commissions,  or  other  charges 
deducted,  and  (c)  for  the  net  proceeds.     The  account  is  credited  for  all  sales. 

522.  Consignment  accounts  are  kept  under  a  designating  title,  such  as  "O.  B. 
Wharton's  Consignment,  Columbus,  O. "  and  if  different  consignments  are  received 
from  the  same  party,  they  should  be  numbered  consecutively.  In  commission 
houses  it  is  usually  the  custom  to  number  all  consignments  in  the  order  received  and 
thereafter  to  refer  to  each  consignment  by  number. 

522a.  Those  who  make  a  specialty  of  selling  goods  on  commission  are  kiiown 
as  "commission  merchants".  When  they  sell  stocks,  bonds  and  other  securities, 
they  are  called  "brokers." 


CONSIGNMENT     ACCOUNTS 


159 


Rule  for  Debiting  and  Crediting  Consignment  Accounts. 
523.     Debit  consignment  accounts  for  costs:  credit  for  returns. 


523a.     Debit   the  consignment,   under  an 
appropriate  title  for  all  costs. 


5236.     Credit   the  consignment,  under   an 
appropriate  title,  for  all  returns. 


524.     The  various  applications  of  the  rule  are  as  follows: 


b. 


525.     Debit  consignments, — 

a.  At  the  time  received,  for  all  charges  paid 
such  as  freight,  drayage,  etc. 
When  on  hand,  for  all  charges  for  cooper- 
age, boxing,  bagging,  repacking,  adver- 
tising, or  other  outlays  necessary  for 
the  preservation  of  or  for  effecting  the 
sale  of  the  goods. 

For  all  goods  returned  to  us  after  having 
been  sold  and  credited  to  the  consign- 
ment, and  for  shortage,  damage  or  over- 
charge claims  allowed  on  goods  previ- 
ously sold. 

For  all  drafts  accepted  or  paid,  or  for 
other  advances  made  on  account  of  the 
consignment. 

When  account  sales  are  rendered,  for  our 
charges,  such  as  commission,  insurance, 
storage,  guarantee,  etc. 
For  the  consignor's  proceeds  remitted 
with  the  account  sales  or  credited  to 
his  personal  account. 


/• 


527.  Observe  that  in  every  instance  the  ac- 
count is  debited  for  the  cost  to  the  con- 
signor of  all  outlays,  advances,  etc., 
made  on  account  of  the  consignment 
by  the  consignee,  and  for  his  charges 
and  for  the  proceeds  remitted  or  credited 
to  the  consignor. 


526.     Credit  consignments, — 

g.     For  all  sales  of  goods  belonging  to  them. 

h.  For  all  rebates  for  overcharges  on  freight, 
drayage,  etc.,  or  for  other  charges  re- 
bated, previously  debited  to  the  account. 

i.  When  the  charges  exceed  the  total  sales, 
for  the  amount  to  close  the  account 
(owed  by  the  consignor). 


528.  Observe  that  in  every  instance  the  ac- 
count is  credited  for  the  returns  from 
sales,  allowances,  etc.,  received  by  the 
consignee  for  the  account  of  the  consign- 
ment. 


529.  In  a  regular  commission  business,  consignment  accounts  are  kept  in 
special  books  and,  therefore,  do  not  appear  separately  in  the  ledger.  In  some 
systems  of  commission  accounting,  controlling  accounts  are  kept  in  the  general 
ledger.  The  latest  and  best  methods  in  commission  accounting  are  fully  explained 
in  the  regular  commission  set  accompanying  this  text. 


160  BOOKKEEPING   AND   ACCOUNTANCY 

To  Close  Consignment  Accounts. 

530.  The  object  is  to  ascertain  the  amount  of  the  consignor's  'proceeds  and  the 
consignee's  compensation,  such  as  commissions,  storage,  guarantee,  etc. 

531.  Before  closing  it  is  customary  (1)  to  prepare  the  account  sales,  (2) 
then  to  make  the  proper  entries  for  the  charges,  etc.,  and  for  the  net  proceeds,  after 
which  the  proceeds  are  remitted  or  credited  to  the  consignor. 

532.  To  prepare  the  account  sales.  From  the  consignment  account  it  is  cus- 
tomary to  make  out  the  account-sales  as  follows :  (a)  fill  out  the  heading  of  the 
account-sales;  (b)  from  the  credit  side  of  the  consignment  account  enter  the  amount 
of  sales,  referring,  if  necessary,  to  the  books  of  original  entry  for  the  items;  (c)  from 
the  debit  side  of  the  account  enter  the  amount  of  the  charges  already  paid;  (d) 
calculate  and  enter  on  the  account-sales  the  charges  for  commission,  insurance, 
storage,  guarantee,  etc. ;  (e)  deduct  the  total  charges  from  the  total  sales,  which 
will  give  the  proceeds  belonging  to  the  consignor. 

533.  To  close.  When  the  account  sales  has  been  prepared,  it  will  be  observed 
that  the  entries  for  the  sales  and  for  the  frei.^ht  and  other  charges  already  paid 
(^525  a,  b,  c)  have  been  made  in  the  books,  and  ^he  only  entries  that  remain  to  be  made 
are  for  the  commission  and  other  charges,  and  for  the  proceeds,  which  are  not  deter- 
mined until  the  account  sales  is  prepared.  Therefore,  to  close  the  account,  make 
the  proper  entry  for  the  charges  not  yet  entered,  and  for  the  proceeds  if  they  are  to 
be  credited  to  the  consignor's  account.  If  the  proceeds  are  to  be  remitted,  write 
the  check  or  note  or  other  paper  for  the  proper  amount  and  make  the  proper  entries 
for  the  same.  When  these  are  posted,  the  consignment  account  should  balance, 
when  the  proper  closing  lines  and  footings  should  be  entered. 

COMMISSION  ACCOUNT. 

534.  Commission  is  a  percentage  charged  by  commission  merchants,  agents, 
or  brokers  for  services  in  buying  and  selling  merchandise,  real  estate,  stocks,  bonds, 
mortgages,  insurance,  or  other  forms  of  property.  This  account  is,  therefore,  a 
service  account.  It  is  debited  for  the  cost  of  all  commission  services  received 
(which  we  pay  for)  and  credited  for  the  returns  from  all  commission  services  given. 
When  commissions  from  various  sources  are  to  be  shown  separately  in  the  profit 
and  loss  statement,  they  may  be  classified  to  whatever  extent  desired  by  distribut- 
ing them  on  an  analysis  sheet. 


commission  account  161 

Rule  for  Debiting  and  C' reciting  Commission  Accounts. 

535.     Debit  commission  accounts  for  cods:  credit  for  returns. 

536,     Debit  commission  account,  under  the  537.     Credit  commission  account,  under  the 

proper  heading, —  proper  heading, — 

a.     For  the  value  of  all  commission  services  c.      For  the  value  of  all  commission  services 

earned  and  unpaid,  owed  to  us  by  others  earned  and  unpaid,  owed  to  others  by 

at  the  beginning  of  business.  us  at  the  beginning  of  Itufsiness. 

6.      For  the   value   of  commission   services  d.     For   the   value  of  commission  services 

received  from  others  and  paid  for  l)y  us  given  to  others  for  which  they  pay  us  or 

or  credited  to  them.  we  debit  them. 

538.     Observe  that  in  every  instance  the  ac-  539.     Observe  that  in  every  instance  the 

count  is  debi-ted  for  the  cost  of  commis-  account  is  credited  for  the  returns  from 

sion  services  received.  commission  services  given. 

540.  The  difference  between  the  two  sides  of  a  commission  account  shows  a 
loss  when  the  debit  side  is  the  larger  and  a  gain  when  the  credit  side  is  the  larger. 

541.  To  close.  After  the  profit  and  loss  statement  has  been  prepared,  com- 
mission accounts  are  closed  by  a  journal  entr}^  made  up  from  the  profit  and  loss 
statement.  When  the  closing  item  to  a  commission  account  has  been  posted,  which 
should  balance  the  account,  rule  the  closing  lines  in  red  ink,  and  enter  the  footings 
in  black  ink.     ' 

BRANCH   STORE  ACCOUNTS. 

541.  When  one  or  more  branch  stores  are  conducted,  either  in  the  same  or 
other  cities,  accounts  with  each  of  them  should  be  kept  in  the  ledger  of  the  main 
store.  Several  methods  of  keeping  such  accounts  are  in  common  use.  Two  of  the 
simplest  and  most  practical  are  here  explained,  one  being  an  amplification  of  the 
other. 

541a.  First  method.  This  method  involves  the  opening  of  but  one  account 
with  the  branch  store.  This  account  is  opened  under  a  title  that  designates  the 
location  of  the  store,  as  "INIarket  Street  Store,"  or  if  in  another  city,  "Omaha 
Store — 96  Main  St. "  The  account  is  debited  for  everything  furnished  by  the  main 
store  or  for  account  of  the  main  store,  i.e.,  for  all  costs  of  the  branch  store;  and  it  is 
credited  for  all  returns  to  the  main  store  of  cash,  notes,  or  any  other  value  sent 
in  for  credit  from  the  branch  store.  The  account  is  treated  exactly  the  same  as 
a  merchandise  account,  except  that  at  closing,  the  total  net  resources  of  the  branch 
store  must  be  included  as  an  inventory.  A  single  account  may  be  kept,  or  separate 
accounts — one  for  costs  and  the  other  for  returns — may  be  kept.  All  bills  of  goods 
intended  for  the  branch  store  should  be  returned  to  the  main  store,  after  having 
been  checked,  found  correct,  and  entered  in  the  books  of  the  branch  store. 


162 


BOOKKEEPING   AND   ACCOUNTANCY 


Second  method.  This  method  is  exactly  similar  in  principle  to  the  method 
already  described,  except  that  separate  accounts  are  kept  in  the  books  of  the  main 
store  for  the  various  items  represented  in  the  costs  and  returns  of  the  branch  store, 
which  are  exactly  similar  to  the  accounts  kept  for  the  same  costs  and  returns  of 
the  main  store. 

RuiE  FOR  Debiting  and  Crediting  Branch  Store  Accounts, 
542.     Debit  bratich  store  accounts  for  costs:  credit  for  returns. 


543.  Debit  the  branch  store,  under  its 
proper  title,  or  sub-title,  in  the  books  of 
the  main  store, — 

a.  For  all  goods  or  money  furnished  it 
from  the  main  store. 

b.  For  all  goods  bought  for  it  or  by  it  for 
account  of  main  store  and  sent  direct 
to  the  branch  store. 

c.  For  all  outlays  for  furniture,  fixtures, 
delivery  equipment,  salaries,  rents, 
taxes,  drayage,  or  other  investments  or 
expenses  on  account  of  the  branch  store. 


544.  Credit  the  branch  store,  under  its 
proper  title  or  sub-title,  in  the  books  of 
the  main  store, — 

d.  For  all  cash,  notes,  acceptances,  ac- 
counts, etc.,  returned  to  the  main  store, 
and  for  all  cash  deposited  in  bank  to 
the  credit  of  the  main  store. 

e.  For  all  goods  sold,  as  shown  by  reports 
of  sales,  when  a  separate  account  for 
sales  is  kept. 

/.  For  all  merchandise  or  other  property 
returned  to  the  main  store  after  it  has 
been  charged  to  the  branch  store. 

g.  For  all  returns  from  any  investment,  ex- 
pense or  other  account  turned  into  the 
main  store. 


545.  When  separate  principal  and  subsidiary  trading  accounts  are  kept  for  the 
branch  store  in  the  books  of  the  main  store,  the  items  indicated  in  ^543a  and 
•[544d  correspond  with  the  debit  and  credit  items  of  an  ordinary  personal  account. 
Items  included  in  1[5436  and  ^544e-/  correspond  with  the  ordinary  purchase,  sales 
and  subsidiary  trading  accounts  and  items  indicated  in  ^543c,  and  ^544g  cor- 
respond to  similar  items  appearing  in  the  usual  investment,  expense  and  income 
accounts. 

545a.  When  the  second  method  is  used,  the  inventories  are  distributed  to  the 
various  accounts  which  they  affect  in  the  preparation  of  the  trading  statement  at 
the  closing  of  the  ledger. 

545&.  When  branch  stores  are  located  at  a  considerable  distance  from  the 
main  store,  as  a  matter  of  convenience  the  cash  received  is  sometimes  deposited  in 
a  nearby  bank  other  than  the  one  in  which  the  account  with  the  main  store  is  kept. 
When  such  is  the  case,  it  is  deposited  in  the  name  of  the  owner  and  is  subject  to  his 
check.  This  does  not  in  any  way  affect  the  manner  of  keeping  the  accounts  ex- 
cept that  a  different  check  book  and  bank  book,  are  kept  and  when  cash  is  balanced 
the  balance  in  this  bank  must  be  added  to  the  balance  in  the  regular  bank  of  the 
concern. 


feRAiSICH    STORE    ACCOUNTS  163 

545c.  The  books  in  the  branch  store  are  kept  exactly  Uke  the  books  of  any 
other  store  except  that  the  inain  store  account  represents  the  owner's  interest  and 
should  be  kept  in  the  same  way.  Its  title  should  be  the  same  as  that  represent- 
ing the  ownership  in  the  main  store.  The  main  store  account  should  be  credited 
for  the  net  gain  or  debited  for  the  net  loss  at  the  time  of  closing  the  books. 

545f?.  Frojyi  this  it  will  be  seen  that  the  branch  store  has  no  accounts  with 
the  parties  from  whom  goods  are  bought,  whether  shipped  direct  to  the  branch 
store  or  not.  After  seeing  that  the  bills  are  correct,  they  are  turned  over  to  the  main 
store,  first  making  the  proper  entries  for  the  same  in  the  books  of  the  branch  store, 
crediting  the  main  store. 

545e.  Branch  stores  are  required  to  make  daily,  weekly,  or  monthly  state- 
ments showing  purchases,  sales,  receipts,  payments,  expenses,  incomes,  etc.,  and  at 
stated  times  complete  trading  and  profit  and  loss  statements,  and  statements  of  re- 
source and  liabilities  are  sent  in,  which  are  checked  against  the  accounts  of  the 
main  store,  and  from  which  adjusting  entries  are  made. 

To  Close  Branch  Store  Accounts. 

546.  The  object  is  to  show  the  profit  or  the  loss  derived  from  conducting  the 
branch  store. 

547.  The  inventories  relating  to  branch  store  accounts  consist  of  an  inventory 
of  the  total  resources  of  the  branch  store,  which  includes  not  only  the  merchandise, 
but  also  furniture  and  fixtures,  cash  on  hand,  personal  accounts  receivable,  notes 
receivable  or  any  other  thing  of  value,  as  shown  by  the  statement  of  resources  and 
liabilitites  taken  from  the  books  of  the  branch  store,  and  an  inventory  of  the  total 
liabilities,  if  any,  of  the  branch  store,  as  shown  by  the  same  statement.  After  these 
inventories  are  disposed  of,  as  instructed  in  1]  464  to  474c,  the  difference  between  the 
two  sides  of  the  branch  store  account  will  show  a  net  gain  or  loss — a  gain  if  the  credit 
side  is  the  larger,  a  loss  if  the  debit  side  is  the  larger.  This  net  gain  or  loss  should 
appear  as  an  item  in  the  trading  statement  of  the  main  store. 

548.  To  close.  After  the  trading  statement  has  been  prepared,  this  account 
is  closed  by  a  journal  entry  made  up  from  the  items  appearing  in  the  trading  state- 
ment. When  the  closing  item  for  this  account  has  been  posted,  which  should 
balance  it,  then  rule  the  closing  lines  in  red  ink  and  enter  the  footings  in  black  ink, 
as  shown  in  other  similar  accounts. 


164  BOOKKEEPING  AND   ACCOUNTANCY 

BRIEFER  EXPLANATIONS  OF  ACCOUNTS. 

549.  Stocks  and  bonds.  A  general  account  may  be  kept  under  this  title,  or 
a  separate  account  may  be  kept  with  each  kind  of  stocks  or  bonds  purchased,  such 
as  "Penna.  R.  R.  Stock,"  or  "U.  S.  Bonds."  The  account  is  debited  for  all  costs 
and  credited  for  all  returns,  and  is  kept  exactly  like  property  investment  accounts 
(T[376),  a  separate  expense  and  income  account  being  kept  for  any  outlays  or  re- 
turns in  the  shape  of  taxes,  dividends,  interest,  etc. 

549a.  Stocks  and  bonds  are  inventoried  at  cost  price,  or  at  market  price  when 
less  than  cost  price.  If  it  is  desired  to  carry  stock  or  bonds  at  cost  on  the  ledger,  if 
the  market  price  is  less  than  the  cost  price,  a  reserve  account  may  be  opened,  which 
should  be  credited  for  the  amount  of  the  depreciation  at  the  time  of  closing  the  books. 
The  expense  and  income  account  belongs  to  the  profit  and  loss  statement. 

550.  Sundry  debtors  and  sundry  creditors  accounts.  "Sundry  Debtors" 
is  a  title  under  which  accounts  with  transient  or  irregular  customers  are  entered, 
the  purpose  being  to  avoid  the  necessity  of  opening  a  separate  account  with  each 
person.  When  a  sale  is  made  to  a  transient  customer,  sundry  debtors'  account  is 
debited  for  the  amount,  the  name  of  the  party  being  written  in  the  explanation  col- 
umn. When  payment  is  received,  the  party  is  credited  for  the  amount  on  the  same 
line  on  the  credit  side  of  the  account.  The  difference  between  the  two  sides  of  the 
account  shows  the  amount  owed  to  us  by  others  and  is,  therefore,  a  resource,  which 
should  be  included  in  the  list  of  accounts  receivable  in  the  statement  of  resources 
and  liabilities. 

Illustration  99. 


-2/  ^. t^z^:;..,,-^  g'^ 


550a.  Sundry  creditors'  account  is  kept  in  the  same  manner  as  the  sundry 
debtors'  account,  the  only  difference  being  that  sundry  creditors'  account  is  first 
credited,  and  is  then  debited  on  the  line  opposite  when  the  credit  item  is  paid. 
The  difference  shows  a  liability,  and  this  account  should  be  included  in  the  list  of 
accounts  payable. 


EXPLANATION   OF   ACCOUNTS  165 

551.  Executors  and  administrators'  accounts.  It  is  frequently  necessary  for 
business  men  to  take  charge  of  the  settlement  of  estates.  To  avoid  the  necessity 
of  keeping  a  separate  set  of  books,  the  necessary  accounts  are  sometimes  carried  in 
the  books  of  their  business,  although  this  practice  is  not  commended,  on  the  princi- 
ple that  such  accounts  should  not  be  mixed  with  the  regular  accounts  of  a  business. 
Tn  some  states  it  is  prohibited  by  law.  When  this  plan  is  followed,  however,  a  gen- 
eral account  with  the  estate  should  be  kept  under  the  name  of  the  estate,  as, 
"Estate  of  Henry  Wilson,"  which  is  debited  and  credited  like  an  owner's  account. 
It  is  credited  for  all  the  assets  of  the  estate  and  debited  for  all  the  liabilities.  Sepa- 
rate accounts  for  these  assets  and  liabilities  should  be  opened  under  appropriate 
titles.  Separate  personal  accounts  should  be  kept  with  each  heir  or  legatee,  which 
should  be  charged  for  all  money  paid  to  them  on  account  of  the  estate.  When  it  is 
desired  to  make  a  report  of  the  affairs  of  the  estate  prior  to  or  at  the  time  of  its 
final  settlement,  the  accounts  belonging  to  the  estate  should  be  made  up  in  a  sepa- 
rate statement,  any  profits  or  losses  belonging  to  the  estate  being  closed  in  the  usual 
way  into  the  general  account  of  the  estate. 

551a.  When  closing  the  books  of  a  husi7iess  which  includes  executors  or  adminis- 
trators^ accounts,  these  accounts  should  not  appear  in  the  statement  of  resources 
and  liabilities  of  the  business,  but  the  difference  between  the  total  debits  and  the 
total  credits  of  these  accounts  should  be  shown  in  a  single  item  in  the  statement 
of  resources  and  liabilities  as  a  personal  resource  or  Hability  of  the  executor  or 
administrator  of  the  estate,  this  being  necessary  in  order  to  maintain  an  equilib- 
rium of  debits  and  credits  in  the  trial  balance. 

5516.  In  recent  years  the  trust  companies  of  the  country  have  been  acting  in  the 
capacity  of  executors  and  administrators  for  estates,  and  have  largely  superseded 
individuals.  Their  methods  of  keeping  such  accounts  are  similar  in  principle  to  those 
already  described. 

552.  Leasehold  account.  This  is  an  account  which  is  opened  when  a  lease 
covering  a  term  of  years  is  purchased.  The  value  of  the  lease,  therefore,  is  reduced 
each  year,  as  it  expires,  in  proportion  to  the  number  of  years  it  has  to  run.  This 
account  is  treated  in  every  respect  like  an  insurance  account  (^325),  the  monthly, 
quarterly  or  annual  expired  value  of  the  lease  being  credited  to  the  leasehold  account 
and  debited  to  leasehold  expense,  rent,  or  general  expense.  It  is  a  resource  account, 
and  should  be  included  in  the  statement  of  resources  and  liabilities. 

553.  Collection  and  exchange  is  an  account  which  is  kept  to  show  the  cost  of 
making  collections  through  banks,  collection  agencies,  etc.  It  is  debited  for  the  cost 
of  making  collections  from  others  and  credited  for  any  returns  for  like  service 
rendered  to  others.     It  is  seldom  kept  as  a  separate  account  except  in  banks,  as 


166  BOOKKEEPING  AND   ACCOUNTANCY 

Buch  items  are  usually  charged  to  general  expense,  although  a  separate  account  may 
be  kept  where  there  is  a  sufficient  number  of  items  to  justify.  It  is  a  service  account 
and  should  be  included  in  the  profit  and  loss  statement. 

554.  Good-will  account.  The  good-will  of  a  business  is  frequently  considered 
valuable  and  may  be  bought  and  sold  in  the  transfer  of  the  business  into  new  hands. 
Good-will  is  the  value  placed  upon  the  disposition  or  inclination  of  the  people  to 
patronize  a  particular  business,  owing  to  the  reputation  it  has  already  established. 

554a.  When  the  purchaser  is  a  corporation  and  the  bill  of  sale  covers  a  specified 
amount  to  be  paid  for  good-will,  for  which  that  account  is  debited  when  opened,  the 
rule  is  to  let  it  stand  without  change  at  the  close  of  subsequent  fiscal  periods,  as 
the  amount  does  not  mean  anything  except  to  show  what  the  good-will  cost  in  the 
first  instance.  The  practice  is  not  unusual,  where  sufficient  profits  are  being  made, 
to  write  off  against  profits  a  certain  percentage  of  the  amount  charged  to  good-will 
account;  but  it  should  not  be  overlooked  that  this  practice,  unless  it  be  to  correct 
an  actual  shrinkage  in  the  value  of  the  good-will  since  the  date  it  was  acquired  is, 
in  a  sense  setting  aside  a  secret  reserve,  which  is  condemned  by  some  authorities. 
However,  if  a  special  reserve  for  that  specified  purpose  is  set  up  so  that  the  entire 
transaction  is  shown  in  the  statements  of  the  company,  it  would  seem  that  no  valid 
objection  to  this  practice  could  be  sustained. 

5546.  When  the  purchaser  is  an  individual  or  a  firm,  the  account  is  usually 
credited  at  the  close  of  each  fiscal  period  for  such  proportion  of  the  amount  debited 
as  may  be  determined  upon  by  the  owners,  which  should  be  charged  to  profit  and 
loss  and  should  appear  as  a  separate  item  in  the  profit  and  loss  statement. 

554c.  The  difference  shown  by  a  good-will  account  is  considered  as  a  fixed 
resource  (asset),  since  its  value  is  fixed  and  it  cannot  be  used  as  working  capital. 
Good-will  is  taxable  in  some  states.  It  should  appear  in  the  statement  of  resources 
and  liabilities.  If  treated  as  indicated  in  ^5546,  the  account  will  eventually  dis- 
appear; and  it  is  generally  preferred  by  business  men  that  it  should  be  wiped  off 
the  books  as  soon  as  possible,  certainly  as  soon  as  the  good-will  of  the  old  concern 
can  fairly  be  considered  as  being  merged  into  the  new  concern. 

555.  C.  O.  D.  accounts.  Where  goods  are  sold  C.  O.  D.  (collect  on  delivery), 
various  methods  are  followed.  With  some  it  is  the  custom  to  charge  the  express 
company  with  the  amount  of  the  bill  instead  of  the  party  to  whom  the  goods  are 
shipped,  because  the  express  company  is  responsible  either  for  the  return  of  the 
money  or  of  the  goods.  When  this  method  is  followed  the  name  of  the  express 
company  should  be  followed  by  the  letters  "  C.  O.  D."  Another  method  is  to  debit 
the  account  of  the  party  to  whom  the  goods  are  shipped,  writing  the  letters  "C.  O. 
D."  in  connection  with  the  charge  made  and  in  the  explanation  column  of  the  ac- 
count in  the  ledger.  In  any  event,  the  account  is  treated  the  same  as  a  personal 
account,  the  difference  showing  a  debit  balance,  which  is  a  resource  that  should  be 
included  in  the  statement  of  resoiu'cos  and  liabilities. 


RESERVE   ACCOUNTS 


167 


556.  Agents'  accounts.  The  method  of  keeping  these  accounts  varies,  depend- 
ing upon  the  contract  made  with  the  agent.  In  case  his  duties  are  limited  to  those 
of  a  salesman  or  "  drummer,"  his  account  is  not  different  from  an  ordinary  personal 
account,  being  debited  for  all  cash  or  goods  advanced  to  him  and  credited  for  the 
amount  of  his  expenses  as  per  his  expense  bills,  and  also  for  his  salary  or  commission 
at  stated  intervals.  In  this  case  the  account  shows  what  he  owes  or  what  is  owed  to 
him,  and  the  balance  is,  therefore,  a  resource  or  a  liability.  If,  however,  he  acts  as 
a  resident  agent  in  another  city  and  goods  are  shipped  in  his  care,  it  is  the  best 
practice  to  open  a  separate  account  for  the  goods,  which  is  in  every  way  kept  and 
closed  like  a  shipment  account,  as  described  in  ^[503,  ^515,  etc. 

557.  Reserve,  surplus  and  undivided  profits  accounts.  These  are  accounts 
which  are  usually  opened  in  the  books  of  stock  companies  or  corporations  to  show 
the  amount  of  the  annual  profits  which  have  been  retained  in  the  working  capital 
of  the  business  for  special  purposes  and  not  distributed  among  the  stockholders. 
(^450  to  H453).    Such  accounts  usually  show  credit  balances. 

557a.  Reserve  account,  setting  apart  a  sufficient  amount  of  the  profits  to 
meet  any  contingent  expense  or  loss  of  the  business,  may  be  opened  to  offset 
charges  against  profits,  such  as  bad  debts,  depreciation,  etc.  A  reserve  account  is 
credited  for  the  amount  of  the  profits  set  apart  for  the  particular  purpose  indicated 
in  the  title  of  the  account.  It  is  debited  for  such  sums  as  are  necessary  to  meet 
the  purpose  for  which  the  profits  were  reserveci. 

5576.  Surplus  and  undivided  profits  are  practicably  synonymous  accounts, 
both  showing  profits  belonging  to  the  owners  which  have  not  been  distributed. 
Surplus  account,  however,  is  generally  understood  to  represent  that  part  of  the 
profits  which  has  been  set  apart  as  a  permanent  addition  to  the  working  capital. 
Undivided  profits  account  generally  represents  that  part  of  the  net  profits  which 
is  "leftover"  after  the  different  sums  for  the  various  reserve,  dividend,  surplus 
and  other  accounts  have  been  set  apart  and  deducted.  Surplus  and  undivided 
profits  accounts  are  credited  for  the  amounts  of  the  profits  set  apart  for  the  purpose 
indicated  in  the  title  of  the  account.  They  are  debited  when  the  purposes  for 
which  they  were  opened  have  been  accomplished. 

557c.  The  difference  shown  by  a  reserve,  surplus  or  undivided  profits  account 
always  appears  as  a  credit  balance,  representing  the  unused  or  available  value  of 
the  particular  reserve,  surplus,  etc.,  indicated  in  the  title  of  the  account.  When 
reserve  accounts  are  set  up  for  a  special  purpose,  such  as  reserves  for  depreciation 
of  property  or  other  resources,  for  doubtful  accounts,  etc.,  such  reserves  should  be 
deducted  from  the  book  value  of  those  accounts  on  the  statement  of  resources  and 
liabilities,  the  net  amount  being  extended  as  the  actual  resource.  This  method  is 
required  by  banks  where  financial  statements  are  prepared  with  the  object  of  secur- 
ing loans.  Balances  shown  by  surplus,  undivided  profits  and  other  similar  accounts 
which  are  general  in  character,  are  classed  as  secondary  liabilities  of  the  concern, 
and  as  such  should  appear  as  separate  items  in  the  section  of  the  statement  of  re- 
sources and  liabilities  (TI4886)  representing  the  ownership  of  the  business.  Observe, 
however,  that  such  accounts  as  "  Reserve  for  Depreciation,"  "  Reserve  for  Doubtful 


168  BOOKKEEPING   AND   ACCOUNTANCY 

Accounts,"  or  other  accounts  which  are  specific  in  their  character,  are  not  classed 
as  habihties  but  as  offsets  against  resources  (assets)  and  should  be  deducted  from  the 
corresponding  resource  account  in  the  statement  of  resources  and  liabilities.  A 
fund  reserve  account  that  offsets  a  fund  account  is  more  in  the  nature  of  a  respon- 
sibiliiij  than  a  liability. 

557d.  Reserve  accounts,  as  described  in  the  preceding  paragraphs  (^557, 
etc.)  must  not  be  confused  with  fu7id  accounts,  which  represent  funds  that  are 
actually  taken  from  the  working  capital  in  cash  and  set  apart  to  create  sinking, 
redemption  and  other  funds,  as  described  in  ^558.  The  distinction  is  clearly  shown 
when  we  say: 

Sinking  fund  1  f  Sinking  fund  reserve 

Redemption  fund    \  as  contra  to  \  Redemption  fund  reserve 

Interest  fund  j  [  Interest  fund  reserve 

558.  Sinking  and  redemption  funds,  etc.  "A  fund"  may  be  created  for  a 
number  of  purposes,  among  them,  (1)  to  liquidate  a  known  existing  liability,  such  as 
bonded  indebtedness,  (2)  to  provide  an  available  or  quick  asset  to  meet  a  specific 
future  obligation,  such  as  plant  renewal  or  betterment,  and  (3)  to  provide  against 
any  embarrassing  contingency  or  unexpected  losses.  These  funds  are  usually  taken 
out  of  the  cash  assets  of  the  business,  and  may  be  deposited  in  a  separate  bank  ac- 
count or  converted  into  interest-bearing  securities  or  other  form  of  property  which 
will  earn  an  income,  or  they  maybe  transferred  to  a  trustee  or  other  agent  who  shall 
invest  them  in  such  securities  or  make  such  disposition  of  them  as  is  required  by 
the  agreement  with  the  trustee  or  agent.  Two  classes  of  accounts  are  required  for 
the  proper  record  of  such  funds,  one  class  representing  the  profits  set  apart  for  the 
creation  of  these  funds,  which  are  known  Rsfund  reserve  accounts.  These  accounts 
are  similar  to  those  described  in  ^557a,  except  that  they  include  in  their  titles  the 
name  of  the  corresponding  fund  account  to  which  they  belong.  The  other  class 
shows  the  investment  or  disposition  of  these  funds  (the  actual  cash  or  equivalent) 
which  are  known  as  sinking  or  redemption  fund  accounts,  of  which  several  accounts 
may  be  required  to  show  the  transactions  in  relation  to  a  single  sinking  or  redemp- 
tion fund.  In  large  corporations  a  separate  set  of  books  is  usually  kept  to  contain 
the  sinking  fund  accounts.  In  both  classes  of  accounts,  the  identity  of  the  fund 
to  which  such  accounts  belong  should  be  indicated  in  the  title,  such  as  "Sinking 
Fund  Reserve,"  "Redemption  Fund  Reserve,"  "Bonds  in  Sinking  Fund,"  "Sink- 
ing Fund  Trustee,"  etc.  It  should  be  remembered  that  the  reserve  accounts  show 
the  amount  of  the  profits  that  has  been  set  apart /or  the  creation  of  the  fund,  while 
the  fund  accounts  show  the  investment  or  disposition  that  has  been  made  of  the  fund; 
consequently,  they  arecojitra  accounts,  one  offsetting  the  other  in  purpose,  although 
they  may  differ  in  the  amounts  shown  in  each  account  at  a  given  time.  Hence, 
reserve  accounts  usually  show  credit  balances,  while  fund  accounts  usually  show 
debit  balances. 


RESERVE    ACCOUNTS 


169 


Rules  for  Debiting  and  Crediting  Fund  Reserve  Accounts. 


558a.     Debit  fund  reserve  accounts, — 

1.  For  premiums  on  investments  when  it 
is  desired  to  carry  the  investments  at 
par. 

2.  For  losses  incurred  in  connection  with 
realizing  on  securities. 

3.  For  taxes  on  the  investments  or  incomes 
therefrom,  in  states  where  they  are  tax- 
able. 

4.  For  expenses  incurred  in  making  invest- 
ments. 

5.  For  amount  "to  close"  when  the  reserve 
has  served  its  purpose. 


5586.     Credit  fund  reserve  accounts, — 

1.  For  all  amounts  set  apart  from  profits 
to  create  the  reserve  named  in  the  title. 

2.  For  interest  received  on  bonds  pur- 
chased for  and  belonging  to  the  fund. 

3.  For  dividends  received  on  stocks  pur- 
chased for  and  belonging  to  the  fund. 

4.  For  interest  received  on  mortgages  (if 
any)  belonging  to  the  fund. 

5.  For  interest  received  on  current  bank 
balance  in  the  fund. 

6.  For  profits  on  sales  of  any  securities 
belonging  to  the  fund. 

7.  For  discoimt  on  bonds  or  stocks  when 
it  is  desired  to  carry  them  at  par  in 
the  fund. 

8.  For  accrued  income  on  sinking  fund 
investments  at  time  of  closing  books. 


558c.  The  items  for  each  sinking,  redemption,  or  other  fund,  may  be  kept  in 
a  single  account,  but  they  are  usually  separated  into  three  accounts,  one  for  the  cash 
belonging  to  the  fund,  another  for  the  investments  belonging  to  the  fund,  and  a 
third  for  accruals.  The  titles  of  these  accounts  for  a  sinking  fund  would  be, 
"Sinking  Fund  Cash,"    "Sinking  Fund  Investments,"   "Sinlcing  Fund  Accruals." 

Rules  for  Debiting  and   Crediting  the  Various  Fund  Accounts. 


558d.     Debit  fund  cash  accounts, — 

1.  For  all  periodical  payments  of  cash  to 
this  fund. 

2.  For  all  incomes  received  from  invest- 
ments belonging  to  the  fund,  as  (a) 
interest  on  bonds,  (b)  interest  on  bank 
balances,  (c)  dividends  on  stock,  etc. 

3.  For  profits  on  sales  of  securities  in  fund. 

4.  For  cash  received  from  sale  of  invest- 
ment securities. 

5.  For  cash  received  from  accruals  col- 
lected. 

558/.     Debit  fund  investment  accounts, — 
1.     For   cost    of    all    securities    purchased 
(generally  at  par.) 


558e-     Credit  fund  cash  accounts, — 
1.  For   all   investments   made   from   fund, 
paid  in  cash. 

For  premiums  paid  on  investments. 
For  expenses   paid   in   making   invest- 
ments. 

For  all  cash  paid  from  this  fund  in  liqui- 
dating the  liabilities  for  which  it  was 
created. 

For  any  other  payments  made  from  the 
fund. 
6.     For  the  amount  "to  close"  when  the 

fund  has  served  its  purpose. 
55Sg.     Credit  fund  investment  accounts, — 
1.     For  returns  from   all  securities    sold, 
at  the  amount  for  which  they  were  car- 
ried  in   the   fund    (generally   at    par.) 


558h.    Debit  fund  accrual  accounts, — 

1.  For  aH  payments  duo  the  fund  at   the 
time  of  closing  booki. 

2.  For  all  accrued  income  at  time  of  clos- 
ing the  books. 


558i.   Credit  fund  accrual  accounts, — 
1.     For  cash  received  for  anything  previ- 
ously debited. 


170  BOOKKEEPING   AND   ACCOUNTANCY 

558;'.  The  three  accounts  explained  in  the  preceding  paragraph  may  be 
combined  in  a  single  account  when  the  fund  is  small,  although  in  any  case  it  is 
better  to  open  separate  accounts  as  required.  Investments  may  be  carried  in  the 
investment  account  either  at  cost  or  at  par  value. 

55Sk.  A II  balances  shown  by  fund  reserve  accounts  represent  what  may  be 
classed  as  secondary  liabilities,  similar  to  surplus  and  undivided  profits  accounts, 
and  should  appear  contra  to  the  corresponding  sinking  or  redemption  fund  accounts, 
which  show  resources  in  the  statement  of  resources  and  liabilities.  The  sinking  fund 
accounts  show  real  assets,  while  the  reserve  accounts  show  secondary  liabilities  in 
the  sense  that  when  the  balances  represented  are  released  or  transferred  from  these 
accounts,  they  will  go  back  into  the  surplus  or  undivided  profits  account,  andM'ill 
then  be  available  for  distribution  among  the  owners  of  the  business,  or  for  other 
purposes. 

558Z.  Accounts  relating  to  sinking  and  redemption  funds,  and  the  correspond- 
ing reserve  accounts,  admit  of  a  great  variety  of  treatment,  depending  upon  the 
conditions  under  which  the  funds  are  created. 

559.  Bonus  accounts.  Frequently  in  organizing  the  affairs  of  corporations 
it  is  necessary  to  offer  a  bonus  to  secure  the  services  of  promoters,  effect  sales  of 
stock,  or  secure  a  franchise  or  a  charter.  In  such  cases  a  bonus  account  is  opened, 
which  is  debited  for  the  value  of  all  such  bonuses  allowed.  This  account  is  similar 
to  good-will  and  leasehold  accounts.  A  certain  proportion  of  the  amount  charged 
to  the  account  should  be  closed  off  into  profit  and  loss  at  the  close  of  each  fiscal 
period,  until  the  account  is  finally  wiped  out  and  closed. 

560.  Patent  and  copyright  accounts.  These  accounts  are  kept  under  two 
conditions. 

(1)  When  a  patent  or  copyright  is  purchased,  the  account,  under  an  appro- 
priate title,  is  debited  for  the  cost  of  the  patent  or  copyright.  When  all  or  anj^  part 
of  the  patent  or  copyright  is  sold  or  otherwise  disposed  of,  the  account  is  credited 
at  the  cost  value  of  what  is  sold,  i.e.,  for  the  original  price  charged  to  the  account. 
It  must  be  remembered,  however,  that  both  patents  and  copyrights  eventually 
expire  as  determined  by  law,  and  that,  consequently,  their  value  is  decreased 
year  by  year.  The  account  should,  therefore,  be  credited  annually  for  the  propor- 
tionate part  of  the  cost  which  has  been  eliminated  by  the  passage  of  time.  The 
amount  of  such  decrease,  when  credited  to  the  investment  account,  is  debited  to 
the  income  account,  or  to  a  separate  account,  or,  in  the  absence  of  these,  to  profit  and 
loss  account.  Preferably,  such  amounts  should  appear  as  separate  items  in  the  profit 
and  loss  statement. 

(2)  When  only  the  right  or  privilege  is  secured  to  manufacture  or  sell  an  article 
under  a  copyright  or  a  patent  upon  payment  of  a  percentage  or  royalty,  the  account 
is  kept  for  the  purpose  of  showing  the  cost  of  the  royalties  paid.  This  cost  is,  there- 
fore, a  part  of  the  cost  of  the  article  manufactured  or  sold,  and,  consequently,  prop- 


EXPLANATION    OF    ACCOUNTS  171 

erly  belongs  to  the  trading  statement.  A  separate  account  may  be  kept  under  an 
appropriate  title,  or  the  royalties  paid  may  be  charged  directly  to  the  principal 
account  showing  the  cost  of  the  goods  manufactured  or  sold. 

561.  Dividend  account.  This  is  an  account  opened  in  the  books  of  corporations 
and  stock  companies  when  profits  are  to  be  divided  among  the  stockholders.  A 
separate  account  is  generally  opened  for  each  dividend  declared,  as  "  Dividend  No. 
1,"  "Dividend  No.  2,"  and  is  kept  for  the  purpose  of  showing  the  amount  of  each 
dividend  declared  and  also  to  show  the  amount  of  the  different  dividends  that  have 
been  paid  to  stockholders. 

561a.  When  the  dividend  is  declared,  the  account  is  credited  for  the  amount. 
As  each  stockholder  is  paid  his  share  of  the  dividend,  the  account  is  debited  for  that 
amount,  so  that  when  the  dividends  owing  to  all  stockholders  are  paid  in  full  the 
account  should  balance.  If  at  the  close  of  a  fiscal  period  all  dividends  declared  have 
not  been  paid,  the  difference  shows  the  amount  due  to  stockholders  and  is,  there- 
fore, a  liability,  which  should  appear  in  the  ownership  section  of  the  statement  of 
resources  and  liabilities. 

562.  Plant  account.  This  is  a  general  title  that  is  not  infrequently  used  in 
manufacturing  concerns  to  include  the  cost  of  machinery,  implements,  and  other 
property,  excepting  real  estate,  used  in  the  manufacture  of  goods  or  articles  pro- 
duced, although  it  is  the  better  practice  to  open  separate  accounts  for  each.  Plant 
account  is  an  investment  account  which  is  debited  and  credited  exactly  as  real 
estate  investment  accounts  are  debited  and  credited.  Separate  accounts  should  be 
kept  for  repairs  and  renewals  and  other  expenses  connected  with  the  maintenance 
of  the  property  represented  in  a  plant  account,  for  which  proper  reserve  accounts 
should  be  set  up.  This  account  is  sometimes  opened  under  the  title  of '  Machinery ' ' 
account,  or  "Machinery  and  Implements,"  or  "Machinery  and  Tools." 

563.  Labor  account.  This  is  an  account  which  is  usually  found  in  connection 
with  the  books  of  manufacturing  concerns.  It  is  credited  for  the  total  amount 
of  labor  performed,  as  sho^wn  by  the  daily,  weekly  or  monthly  pay-roll.  The  cost 
of  the  labor  should  be  charged  to  the  department  of  the  business  in  which  the  labor 
was  performed. 

563a.  The  account  is  dehitediov  the  total  amount  paid  to  employees  included  in 
the  pay-roll,  whether  in  cash  or  otherwise.  The  account  should  balance  when  all 
the  employees  have  been  paid. 

5636.  The  difference,  \i  any,  shows  what  is  owing  to  employees  and,  therefore, 
is  a  liability  which  should  appear  as  a  separate  item  in  the  statement  of  resources 
and  liabilities  at  the  close  of  the  fiscal  period.    A  labor  account  is  in  reality  a  con- 


172  BOOKKEEPING    AND    ACCOUNTANCY 

densed  personal  account.  However,  it  should  not  be  included  with  the  ordinary 
accounts  payable,  as  in  most  states  those  who  are  owed  for  labor  performed  are 
considered  as  preferred  creditors. 

564.  Franchise  account.  Public  corporations  frequently  secure  v^aluable  fran- 
chises and  privileges  from  cities  and  municipal  corporations,  sometimes  for,  and 
frequently  without  a  consideration.  Such  franchises  are  usually  of  great  value 
to  the  corporation  owning  them.  When  a  franchise  is  purchased,  the  account  is 
debited  for  the  cost  value.  If  there  is  no  cost  value,  formal  accounts  are  seldom  kept, 
such  franchises  being  classified  as  non-ledger  assets.  Under  the  laws  of  most 
states,  however,  certain  limitations  are  placed  upon  including  the  value  of 
franchises  in  statements  of  resources  and  liabilities. 

565.  Doubtful  accounts.  Formerly  it  was  the  rule  to  open  an  account  under 
this  heading  to  show  the  amount  owed  to  the  concern  on  personal  accounts  which 
were  considered  of  doubtful  value.  This  method  has  been  superseded,  however, 
by  that  of  making  a  list  of  such  accounts  at  the  close  of  each  fiscal  i^eriod,  and  then 
setting  up  a  "Reserve  for  Doubtful  Accounts"'  account  sufficient  to  meet  antici- 
pated losses  resulting  from  doubtful  accounts,  no  entry  being  made  in  the  personal 
account  of  the  doubtful  debtor  until  the  account  is  finally  considered  as  uncollect- 
able  and  of  no  value,  when  it  is  charged  against  the  "  Reserve  for  Doubtful  Accounts" 
account.  In  the  absence  of  such  reserve  account,  uncollectable  accounts  should  be 
closed  directly  into  profit  and  loss  account,  and  their  sum  should  appear  as  a  separate 
item  in  the  profit  and  loss  statement. 

566.  Controlling  accounts.  These  are  general  ledger  accounts  that  are  used 
when  separate  ledgers  are  kept  for  different  classes  of  accounts,  such  as  accounts 
receivable,  accounts  payable,  depositors'  accounts  in  banks,  etc.  Each  controlling 
account  is  kept  under  a  title  that  indicates  the  class  of  accounts  included  in  the  sep- 
arate ledger  which  it  represents .  A  separate  ledger,  with  its  accompanying  con- 
trolling account  in  the  general  ledger,  may  be  kept  for  any  class  of  accounts  which 
may  be  classified  by  the  use  of  special  colunms  in  the  various  books  from  which 
the  items  affecting  them  are  posted.  These  separate  ledgers  are  sometimes  desig- 
nated as  subordinate  ledgers. 

566a.  When  a  controlling  account  representing  a  separate  ledger  is  opened 
in  the  general  ledger,  it  is  debited  or  credited  for  the  total  sum  of  the  balances  of 
the  accounts  in  the  ledger  it  represents.  At  stated  times  thereafter,  usually  at  the 
end  of  each  month,  the  controlling  account  is  debited  and  credited  for  the  total 
of  the  debit  and  credit  items  that  have  been  posted  from  the  different  posting  books 
to  the  accounts  in  the  ledger  it  represents;  for  instance,  if  the  total  sales  for  the 
month  charged  to  accounts  in  the  sales  ledger,  as  shown  by  the  sales  book,  are 


EXPLANATION    OF    ACCOUNTS  173 

$10,000,  at  the  close  of  the  month  "accounts  receivable"  (the  controlling  account 
in  the  general  ledger  representing  the  sales  ledger)  is  debited  for  that  amount,  the 
"sales"  account  being  credited.  If  the  total  cash  received  for  the  month  in  payment 
of  accounts  contained  in  the  sales  ledger  is  $9,000,  accounts  receivable  account  is 
credited  for  that  amount.  It  should  also  be  credited  with  other  items,  such  as  dis- 
counts, allowances,  goods  returned,  as  shown  by  the  footings  of  special  columns  in 
other  books  relating  to  customers'  accounts.  The  difference  between  the  two  sides 
of  the  accounts  receivable  account  will  then  show  the  sum  of  the  balances  shown  by 
the  accounts  in  the  sales  ledger. 

5666.  To  facilitate  the  work  of  classifying  the  items  posted  to  the  various 
subordinate  ledgers,  and  of  posting  their  totals  to  the  controlling  accounts  in  the 
general  ledger,  special  columns  for  that  purpose  should  be  provided  in  the  cash 
book,  purchase  book,  sales  book,  note  books,  journal,  and  in  any  other  book  used  as 
a  posting  medium.  The  items  in  these  special  columns  are  footed  and  forwarded 
until  the  end  of  the  month,  when  the  total  amounts  are  posted  to  their  respective 
controlling  accounts  in  the  general  ledger. 

566c.  To  prove  the  correctness  of  the  balance  shown  by  a  controlling  account, 
the  sum  of  all  the  balances  in  the  ledger  it  represents  (less  any  contra  balances) 
should  equal  it.  The  adding  machine  can  be  used  advantageously  for  this  purpose. 
Contra  balances  refer  to  those  that  are  credit  balances  in  a  debit  ledger,  such  as 
the  sales  ledger,  and  to  those  that  are  debit  balances  in  a  credit  ledger,  such  as  a 
purchase  ledger. 

BUSINESS  PAPERS. 

567.  These  are  papers  of  every  description  that  are  used  in  business,  the  most 
important  of  which  are  notes,  drafts  and  acceptances,  checks,  bills,  receipts,  orders, 
statements,  shipping  invoices,  account  sales,  bills  of  lading,  warehouse  receipts, 
letters,  vouchers  and  memoranda  of  every  description.  Notes,  checks  and  drafts 
are  generally  called  commercial  paper. 

567a.  The  use  of  commercial  paper  has  greatly  facilitated  and  lessened  the 
cost  of  transacting  business.  Over  90  per  cent  of  the  exchanges  of  money  are  effected 
through  the  medium  of  checks,  drafts,  etc.  The  charges  for  exchange  between 
different  points,  which  was  formerly  quite  an  item  in  effecting  settlements,  have 
been  almost  entirely  abolished. 

568.  Written  contracts,  such  as  articles  of  co-partnership,  bonds,  mortgages, 
powers  of  attorney,  leases,  deeds,  certificates  of  incorporation,  insurance  policies, 
licenses,  etc.,  are  business  papers,  but  are  more  properly  classed  as  legal  fortns. 

569.  A  promissory  note  is  an  unconditional  written  promise  to  pay  a  speci- 
fied sum  of  monev  at  a  definite  future  time. 


174 


BOOKKEEPING   AND    ACCOUNTANCY 


570.  Parties.  There  are  two  principal  (and  original)  parties  to  a  note,  the 
maker  and  the  payee.  The  maker  is  the  party  who  signs  the  note — who  makes  the 
promise.  The  payee  is  the  party  in  whose  favor  the  note  is  made — the  one  to  whom 
the  money  is  to  be  paid. 


Promissory    Note. 


^<^^   ^ 


yAO. 


PEOPLES 
BANK 


AT  The  Peoples  Bank  of  Buffalo,  N.Y. 


^^ 


570a.  In  the  above  note,  John  P.  Stewart  is  the  maker  and  Henry  M.  Prentiss 
is  the  payee.  Observe  that  the  note  is  made  payable  at  bank,  which  is  presumably 
the  bank  of  the  payee. 


Promissory  Note. 


(^Z3/f- 


//^y'y^/i./T^JyY^  i^yf^^^yVYyy^J . 


'^.^^. 


^y^^.yyyf^'.-^urXci^.-f'Ly  "^V/o-r. 


CfM/'/fl^a.g;  /^ 


C^/^J,TCl.^Z^^^ 


5706.  In  the  above  note,  the  maker  is  the  Bridgeville  Realty  Company, 
and  the  payee  is  Garden  &  Whistler.  Notice  that  the  note,  drawn  December  31, 
at  two  months,  matures  on  February  28,  which  is  the  last  day  of  the  second  month 
following  December.  If  this  note  had  been  made  at  sixty  days  instead  of  two  months, 
the  date  of  maturity  would  have  been  March  1. 


BUSINESS   PAPERS  175 

Note  With  Interbst. 


"Br^ 


z^/Z^M/^^t^J^  .^^^^6^  /^,— ^^ 


i^ji^22:^=3!t!i_=^i22SZa^^2=<== 


■zy(7/^4-:km^  ^.y—  .  ^t€^?^-e<^^ 


/ 


^^^..'0<.-C^--w  ,^-^^'v^^^^<^^-^--^:^-^--<^:^^^<7^^^^.^7><^  — ^2<2=e= 


&4c^^3I. .^^/V?^//  //  .  (  y(y//c^<r~^/f.^<^x<^^- 


570c,  This  is  a  note  "with  interest  from  maturity,"  and  shows  a  form  of  note 
sometimes  used  by  merchants  in  securing  settlement  of  accounts.  Notice  that  the 
note,  which  is  dated  September  12,  at  sixty  days,  matures  November  11,  as  October 
is  a  thirty-one-day  month.  A  note  may  be  made  payable  with  interest  from  date 
of  making  instead  of  from  date  of  maturity.  A  note  bearing  interest  from  the  date  of 
making  is  discounted  at  bank  for  the  amount  of  the  note,  that  is,  the  principal 
plus  the  interest,  which  is  the  maturity  value  of  the  note. 


Demand   Note. 


#  V  #  v  V  •♦  *- 


570(i.  This  illustration  shows  a  note  payable  "on  demand,"  which  is  a  common 
form  of  note  for  borrowing  money  from  bank.  A  "collateral"  note  is  a  similar 
form  of  note,  with  blank  space  left  for  a  brief  description  of  the  collateral.  A  collat- 
eral note  may  also  be  made  payable  a  certain  number  of  days  or  months  after  date. 


176 


BOOKKEEPING   AND   ACCOUNTANCY 


571.  A  draft  is  a  written  request  of  a  first  party,  or  the  drawer,  to  a  second 
part}^  or  the  drawee,  to  pay  a  third  party,  or  the  payee,  a  specified  sum  of  money. 
The  giving  of  a  draft  presupposes  that  the  drawer  has  funds  in  the  hands  of  the 
drawee,  which  will  be  paid  at  the  time  specified  in  the  draft,  and  also  that,  if  the 
drawee  fails  to  make  such  payment  to  the  payee,  the  drawer  will  pay.  The  drawer 
thus  becomes  the  first  endorser  of  the  draft. 


Sight   Draft. 


No.'^^/: 


(oliinibus,0.__^^^;2i. 


^^- 


^% 


y\t:  si^hr  pay  to  the  order  of  jA^.''f-?^z--c<£-i'^77^.4L^^^ 


_%^A3L 


:.Dollar5. 


R£iASUf?£R 


571a.  In  this  draft  the  Capital  City  Dairy  Company  is  the  drawer,  the  Dealers 
Supply  Company  is  the  drawee,  and  James  R.  Meeker  is  the  payee.  The  draft  is 
sent  by  the  drawer  to  the  payee,  who  in  turn  presents  it  for  payment  to  the  drawee. 
The  draft  is  payable  on  presentation,  being  drawn  "at  sight." 


^  "Collection"  Sight  Deaft. 


lll%r^tta^fi:*£ltli<3»^ir»;plitii^®s>*    e^^^^^^ 


i.^ 


f//^^ 


^^^;;??7^,  \-ffr,i?^ 


^^x^a&>n£ 


BUSINESS    PAPERS 


177 


5715  Sio-ht  drafts  are  used  principally  as  a  means  for  collecting  accounts,  in 
which  ease  th?y  are  usually  drawn  in  favor  of  the  bank  at  which  the  drawer  keeps 
Ms  account,  as  shown  in  the  illustration  above,  or  he  may  draw  it  m  his  own  favor 
and  endors;  it  to  the  bank.  When  such  drafts  are  deposited  for  collection,  he 
npVount  of  the  drawer  is  not  credited  until  the  collection  has  been  made.  In  the 
St  mustrated,the01d  Detroit  National  Bank  would  forward  the  draft  to  a  cor- 
^espoiS^a^^^^^  Ind.,  which  would  present  the  draft  to  the  drawee  and 

rer^it  the  amount  to  the  Old  Detroit  National  Bank,  which  in  turn  would  credit 
the  account  of  the  Artcraft  Lithographing  Company. 

A  •■Collection"  Time  Dhaft. 


New  York       Camden. N-<j       fiHieAGO. 

U.S.A. 

MSNUFACTJRERS  OF  LAUNDRY   SUPPLIES 


EST  LO    •B" 

SXATEiMENT. 


J-.C^^^^'/  S^  \  PENROSE  .V  HIBST.^^ 


I 


AT  FI\^  DAVS  sight  *  *  #>  * 


^k^.^  D 


571c.  The  above  illustration  shows  a  draft  which  is  similar  to  the  oiie  explained 
in  t571&  except  that  it  is  drawn  at  five  days'  sight,  which  means  that  it  is  due  and 
payable  five  days  after  it  has  been  accepted  by  the  drawees,  Foster  Brothers;  and, 
therefore,  the  date  of  maturity  is  calculated  from  the  date  of  the  acceptance  and  not 
from  the  date  of  the  draft.  In  this  draft  is  included  a  miniature  stateiiKmt  of  account 
which  is  intended  to  show  the  items  for  which  the  draft  is  drawn.  This  is  a  popular 
addition  to  the  ordinary  draft  used  for  collecting  bills.  Note  that  the  draft  is  made 
payable  to  the  drawer,  the  drawer  and  payee  thus  being  the  same  party.  Such  drafts 
are  usually  remitted  direct  ly  to  the  drawee,  who  writ  es  his  acceptance  across  the  face 
of  it  and  returns  it  to  the  drawer.  It  is  then  known  as  an  acceptance.  The  drawer 
then  deposits  it  in  bank  f  oi'  collection,  writing  the  proper  endorsement  across  the  back. 
When  the  drawee  accepts  the  draft,  he  obligates  himself  to  pay  it  the  same  as  if  he 
had  signed  a  promissory  note.  In  some  cases  the  draft  is  placed  in  bank  for  collec- 
tion before  acceptance,  when  it  is  forwarded  to  a  correspondent  bank  at  the  point 
of  payment,  which  presents  it  for  acceptance  and  holds  the  acceptance  until  it 
is  due,  when  it  collects  the  money  and  forwards  it  to  the  l)ank  from  which  the  draft 
>vas  received,  the  same  as  explained  in  illustration  5716. 


178 

An  Accepted  Draft. 


BOOKKEEPING   AN'D    ACCOUNTANCY 


^;^^:^,££^c^-.ii<<y^<<:--^:.,^^ 


Dqll-ars. 


rn 


^^:^^ 


^^-^-^ 


^^r^t.<>^f-j  77-^:r.^^~ 


(^^jC^i^i.^y^^ 


571d.  This  draft  illustrates  an  ordinary  sixty-day  draft,  which  becomes  due 
and  payable  sixty  days  after  the  date  of  the  acceptance,  August  20,  which  is  Octo- 
ber 19. 


An  Accepted  Time  Draft. 


IIl]RININCHMia:Qi 


^  ^     Cfau^^y:^^ec^(^^/e^^^€^^?^^;y^l<'f(Yr  ,/:>■_  i^y/r-r^r-t.t'^'i^y^y^ 


l^;;^^^?^^^?^^^^/^//:^^^^:?^'  I 


WtUt  Current  rate  o/Ezt^ange  on  A'cM^yori:. 


St-cretary-  ^Irrasurer 

571e.  This  draft  differs  from  the  preceding  draft  in  being  drawn  ''after  date" 
instead  of  "after  sight;"  consequently,  after  acceptance,  it  becomes  due  and  pay- 
able thirty  days  after  March  15,  or  April  14,  irrespective  of  the  date  on  which  it 
was  accepted. 

572.  Drafts  are  of  two  kinds  as  to  time  of  payment,  as  shown  in  the  preceding 
illustrations.  Those  payable  "at  sight"  are  known  as  sight  drafts  and  are  usually 
payable  on  presentation.  Those  payable  "  after  sight "  or  "  after  date  "  are  known  as 
time  drafts.    After  a  time  draft  has  been  accepted,  it  is  known  as  an  acceptance. 


BUSINESS   PAfEfiS  179 

573.  Accepting  a  draft  is  agreeing  to  pay  it  when  it  is  due  by  writing  the  word 
"Accepted"  across  the  face,  followed  by  the  date  and  the  name  of  the  drawee,  who 
thus  becomes  the  "  acceptor,"  and  the  draft  is  known  thereafter  as  an  "  acceptance," 
as  stated  in  the  preceding  paragraph. 

574.  The  date  of  maturity  is  the  date  on  which  the  note  or  draft  falls  due.  When 
the,  time  is  indicated  in  days,  the  exact  number  of  days  is  meant,  not  counting  the 
date  of  making  or  of  acceptance,  l^ut  counting  the  date  of  maturity.  When  the  time  is 
indicated  in  months,  the  same  day  of  the  maturing  month  is  the  date  of  maturity. 

575.  A  draft  drawn  "after  sight"  l)egins  to  mature  Jrotn  the  date  of  the  accept- 
ance, and  when  drawn  "after  date"  it  begins  to  mature  from  the  date  the  draft 
was  drawn  without  regard  to  the  date  of  acceptance.  A  note  begins  to  mature  from 
the.  date  it  is  made. 

576.  Due  on  Sunday  or  a  legal  holiday.  The  law  in  nearly  all  states  is  that 
when  the  due  date  falls  on  Sunday  or  a  legal  holiday,  the  paper  falls  due  on  the  next 
following  business  day.  In  a  very  few  states  they  are  due  on  the  last  preceding 
business  day. 

577.  Days  of  grace  are  three  days  formerly  allowed  in  addition  to  the  time 
specified  for  the  payment  of  commercial  paper.  They  have  been  abolished  in  all 
but  a  few  states,  and  will  doubtless  be  abolished  in  all  states  within  a  short  time. 

578.  Negotiable  notes  and  drafts  are  those  which  can  be  transferred  by  one  party 
to  another.  To  be  negotiable,  a  commercial  paper  must  contain  the  words  "or 
order"  or  "or  bearer."  When  it  does  not  contain  these  words  it  is  said  to  be  non- 
negotiable,  which  means  that  it  cannot  be  transferred  by  simple  endorsement  and 
delivery.  In  most  states  special  statutes  provide  that  such  papers  can  be  transferred 
by  assignment,  though  the  transferee  gets  no  better  title  to  the  paper  than  the  origi- 
nal holder  has. 

579.  Transfer.  When  a  payee  transfers  a  negotiable  note  or  acceptance,  he 
does  so  by  writing  his  name  across  the  back,  and  then  delivers  the  paper  to  the  en- 
dorsee. This  is  known  as  an  endorsement.  When  a  note  is  transferred,  the  payee 
becomes  the  first  endorser;  when  an  acceptance  is  transferred,  he  becomes  the  second 
endorser,  unless  the  draft  is  drawn  by  him  in  his  own  favor,  when  he  is  the  first 
endorser. 

579a.  When  commercial  paper  is  made  payable  "to' bearer,"  it  is  not  neces- 
sary for  the  holder  to  endorse  it  when  transferring  it  to  another,  but  for  prudential 
reasons  it  is  generally  requested  and  usually  required.  The  different  forms  of 
endorsement  are  shown  on  another  page.  The  endorsements  shown  apply  not 
only  to  notes  and  drafts  but  to  checks  and  all  forms  of  negotiable  paper. 


180 


BOOKKEEPING   AND   ACCOUNTANCY 


Check. 


■^/.r- 


^7~ 


'^      ':::=''^^-^^-^:A^C€^^^y^^^=X4L'^y^y-  .r^  ^  y-^^. 


{J(9U^/. 


^^^ 


Mil 


^Sf«, 


580.  A  check  is  a  written  order  directing  a  bank  or  banker  to  pay  money  as 
stated  therein.  It  is  presumed  that  the  party  writing  the  check  has  funds  on  deposit 
against  which  he  issues  the  check.  A  check  is,  in  reality,  no  different  from  a  sight 
draft  except  in  form,  the  drawee  being  a  bank  instead  of  an  individual  firm  or 
corporation. 


Certified  Check. 


S.I3.TlLJFCIVX^V:rV    8^    CO. 

IXXLAJL,  Et»X/*LXK,  RKTVX'EMO  ScltXiA-fi^. 


^ar  TO  rrax:  order 


TO  The  Fou 


f 


JUX- 


A3CXlA3V  TIA.,  GlA^ 


V.,^yti^y-^>>S^£^--f-iZrh^^  (.^:ryyz^^^  ^7/7^  ^^ 


'r:^-^^-7...<:^i^ ' 


irr  13  ox^i-^vx*  ** 


^  -^ 


lONAL    BANK         I 
ATLANTA.  GA.        J 


S.  B.  TURiMATW  8t  CO. 


581.  When  a  check  has  been  "certified"  by  a  bank  as  shown  in  the  illustration, 
the  bank  becomes  responsible  for  its  payment.  When  a  bank  certifies  a  check  it  is 
immediately  charged  to  the  account  of  the  drawer. 


BUSINESS    PAPERS 


181 


582.  A  cashier's  check  is  a  form  of  check  issued  by  banks  in  paying  money  to 
those  who  are  not  depositors,  and  is  usually  signed  by  the  cashier,  or  it  may  be 
signed  by  the  president  or  any  authorized  officer. 


CABHiBe's  Check. 


Des  Moines  National  Bank 


DeaMoines.  Io^*'a. 


y^.  ^/ No.^/ 


BWTOT 
ORDER 


R  OF   "^^fe^^^-X^^Vfe^^-^j^-^^^ 


LJtr^^L^^'^.^t>->^.^<^^^^  ^a^^^L-^gZ^rr^f^^^^^^ //r 


•##^#^# 


-%/sai^ 


Doi>r.^vRS 


CASHIEH. 


583.  A  certificate  of  deposit  is  an  instrument  issued  by  banks  certifying  that 
the  party  named  therein  has  deposited  funds  to  the  amount  stated.  Such  deposits 
draw  interest  when  made  for  a  definite  period,  but,  unless  otherwise  stated,  certifi- 
cates of  deposit  are  payable  on  presentation. 


Certificate  of  Deposit. 


^^ 


'if../^^'?:::.^^.^^ 


584.  A  receipt  is  a  written   acknowledgment  of  money   received,  generally 
setting  forth  the  purpose  for  which  it  was  paid. 


BOOKKEEPING   AND    ACCOUNTANCY 


% 


.^-^^^^^r-/7> 


^(^ 


j^^^-J^ij^^^?-?^*^;^-?./ 


585.  A  bill  is  a  statement  setting  forth  the  amount  of  a  debt,  usually  for  goods 
sold  or  services  rendered,  with  items,  prices  and  terms  stated  in  detail.  A  bill, 
when  received  from  others,  is  often  known  as  an  invoice. 


Bill. 


^Zlciaems^co/yrctionmiiStlier/ia/ismffunijetaysefiiafeo/'imoice. 


^/&/y,-Aj^/f^  ?f^^^^^^^  /^. 


TELEPHONE  6700  RfVERSlDE 


STORAGE.REPAI  RS.su  PPLIES.  ETC. 

51-55  WEST  93"'STREEr. 


/  Zc^u^^t^ Jj^^-^^^^^ :^^z-.^^d^,^  o^o-^  *7. ? 7. / 


Z^^y?.  A/?.J^^^.^.,^^c<,.^y 


y^  /  z 


2000 


'ISJL 


/  C.f:-r.<yU^yJArT.L^^:^j'^C^^y77'7,..'^^Jy  (7^.?^"^  /  77^ 


2^ 


s-jr7J 


'-^ 


C-^^  /z'A  Y„ 


^'^.4 


liL- 


^r/'S' 


■'^^ 


A.Z. 


586.  An  order  is  a  written  request  of  a  first  party  to  a  second  party,  either  in 
favor  of  a  third  party  or  the  first  party,  usually  to  pay  money  or  deliver  goods. 
It  closely  resembles  a  draft,  except  that  the  time  of  payment  is  not  usually  indicated, 
and  it  is  generally  less  formal  in  expression. 


BUSINESS   PAPERS 


183 


MONTHLY  STATEMENT. 


:^2^2^z^.2.^^^^Z^^ 


587.  A  statement  of  account 

is  a  statement  of  an  open 
account  showing  its  present 
condition.  It  may  show  only 
the  amounts  of  the  debit  and 
credit  items,  or  the  nature  of 
each  item  may  be  specified  in 
detail. 


Shipping  Invoice  or  Statement. 


THE  GARFORD  COMPANY. 


ELYRIA,OHIO. 


October  3,  19 


Messrs.  G.  M.  Harrmell  &  Co..  , 

Newark,  N.  J. 
Gentlemen; 

Wo  are  shipping  you  today,  via  Lake  Shore  and  Erie  Railroads.  T-. 
and  M.  S.  car  15,416.,  per  bill  of  lading  enclosed,  to  be  sold  for  our 
account,  at  our  risk,  on  terms  stated  in  yours  of  September  25; 
1000  baskets  Concord  grapes  -  8  lbs. 
360    "    Catawba    "   -   " 
200  bbls.  Northern  Spy  apples. 
Freight  charges  prepaid  to  Dunkirk,  N.  Y. ,  $7.86. 
This  fruit  was  shipped  in  first-class  condition.   We  trust  yow 
will  find  a  ready  market,  at  good  prices.    Please  remit  proceeds 
promptly. 

Very  truly^ 


184 


BOOKKEEPING  AND  ACCOUNTANCY 


588.  A  shipping  invoice  is  an  itemized  statement  of  goods  or  property  shipped 
to  be  sold  on  commission  for  the  account  of  the  consignor. 

589.  An  account  sales  is  an  itemized  statement  of  sales  and  charges  rendered 
by  a  commission  merchant  or  agent  to  the  consignor. 


An  Account  Sales. 


TELEPhONC     6972    BELL 


lApifimeliffe 


EGGS&  POULTRY 


48  Commerce  Street 


,,c/^o«l/(»  October  14,  19 


The  Gar ford  Company, 

Elyria,  Ohio. 
Gentlemen: 

The  following  is  an  account  of  the  sales  of  grapes  and  apples 

shipped  by  you  October  3,  received  October  6,  which  were  sold,  at  the 

best  market  prices  obtainable,  for  your  accotmt; 

760  baskets  Concord  grapes,    6,050  lbs.,  at 
240    "        "      "   ,     1,910  " 
360    "    Catav/ba    "   ,    2,890  "    " 
165  bbls.  Northern  Spy  apples,  " 

35   "       "     "     "   , 

"563.85 

We  deduct  charges  as  follows: 

Freight,  $18.50;  drayage,  .$3.75;  commission  [6%]   #33.83  -  Total  56.18 

Net  proceeds  $507.67 

You  will  find  our  check  for  the  .proceeds  enclosed  herewith. 

Trusting  that  this  account  of  sales  will  be  satisfactory  to  you, 

and  that  v;e  may  receive  further  consignments,  v/e  are 

Very  tru] 


;  .01^/4 

$105.88 

.02 

38.20 

.021/4 

65.02 

1.80 

297.00 

1.65 

57.75 

^^^ 


BUSINESS   PAPERS 


185 


590.  Bill  of  Lading.  A  bill  of  lading  is  a  receipt  for  goods  delivered  to  a  trans- 
portation company  for  shipment,  and  usually  states  certain  conditions  affecting 
the  reponsibilities  of  the  latter  for  the  care  and  delivery  of  the  goods. 

591.  A  voucher  is  a  term  applied  to  any  paper  or  document  that  vouches  the 
truth  of  an  account  or  confirms  a  business  fact. 

592.  A  bank  draft  does  not  differ  from  an  ordinary  sight  draft  except  that  it 
is  drawn  by  one  bank  on  another  bank,  and  is  made  payable  to  the  order  of  a  third 
party,  and  is,  therefore,  a  convenient  and  safe  Avay  to  make  remittances  of  money,  as 
it  is  generally  collectible,  in  cash,  anywhere,  when  the  payee  is  identified. 


Bank  Dkatt. 


^J?^0 


^^ia/cl^^2^^£^     ^^^^^^ 


V'Y/y./y^^///7jA-  ^^^/^       ^^ 


2/o/.- 


^^ 


/?uat^ 


To  HANOVER   NATIONAL  BANK,  J^^^Si 

NEW  YORK,   N.  Y.      ) 


~c:-^'i^^^^ 


593.  Bills  of  exchange  are  similar  to  bank  drafts,  except  that  they  are  usually 
drawn  in  duplicate  for  the  same  amount,  the  object  being  to  provide  against  loss 
of  the  paper  or  delay  in  reaching  the  payee  by  mailing  them  on  different  days  or  by 


Bill  of  Exchange. 


2/^. 


$^ 


^7\  ::y  )^ n:      <?)<?><?> cS) <a & 6p (?) ct 


(h  &  fh  ch  fh  .9^  F.\  &,  K-. 


^       S 


A^'^^iyL-C-T-z^  r-<^^^^^^^^^n^-^^^^...^r^^ 


186  BOOKKEEPING    AND    ACCOUNTANCY 

different  routes.    Bills  of  exchange  are  usually  employed  in  making  remittances  to 
foreign  countries. 

594.  Filing  of  business  papers.  This  is  a  most  important  feature  of  modern 
office  practice.  There  are  many  devices  and  plans  for  the  filing  of  business  papers 
and  letters,  the  object  being  to  locate  them  so  that  they  may  be  easily  and  readily 
referred  to  at  any  future  time.  It  has  become  the  common  practice  to  file  all 
checks,  notes,  drafts,  etc.,  with  the  original  bill  for  which  they  were  issued  in  pay- 
ment. For  instance,  if  a  bill  is  paid  by  note,  and  later  the  note  is  paid  by  check, 
both  the  note  and  the  check  should  be  filed  with  the  bill.  This  note  not  only  exhib- 
its the  ent're  transaction  in  case  of  future  reference,  but  it  also  keeps  the  papers 
in  the  most  convenient  form  for  audit.  This  is  one  of  the  features  of  the  voucher 
system  which  has  made  it  so  popular. 

595.  Auditing  accounts  consists  of  the  accounts  of  a  business  being  examined 
and  verified  with  the  original  business  papers  or  vouchers  by  an  accountant,  auditor 
or  other  authorized  party.  The  accounts  of  banks,  and  of  trust,  transportation, 
insurance  and  similar  public  companies  and  corporations  are  audited  at  stated 
intervals,  and  the  practice  is  rapidly  extending  to  private  corporations  and  firms. 

ACCOUNT  BOOKS. 

596.  As  previously  stated  (1[454),  journalizing  is  the  classification  of  transac- 
tions. This  classification  is  greatly  simphfied  by  providing  a  special  book  for  each 
kind  of  transactions,  and  where  there  are  a  great  many  transactions  to  be  recorded, 
this  plan  permits  of  the  work  being  distributed  among  a  number  of  bookkeepers, 
clerks,  etc.  For  these  and  other  reasons,  account  books  vary  greatly  in  number  and 
design,  depending  largely  upon  the  extent  and  nature  of  the  business  conducted. 
Books  with  special  columns  and  other  features  designed  to  show  certain  desired 
results  are  found  in  almost  every  office,  and  in  this  respect  wonderful  advancement 
has  been  made  in  recent  years. 

597.  It  should  be  remembered  that  no  arrangement  of  books  or  system  of 
accounts  can  be  shown  which  would  be  applicable  for  use  in  every  line  of  business. 
While  the  various  sets  illustrated  in  this  work  are  accurate  representations  of  stand- 
ard bookkeeping  methods  in  the  various  lines  of  business  represented,  certain  modi- 
fications would  likely  have  to  be  made  to  exactly  meet  the  requirements  of  a  particu- 
lar business.  Whether  or  not  specially  designed  books  or  the  use  of  special  columns 
in  any  book  can  be  used  profitably,  depends  upon  the  classification  of  accounts 
employed,  the  amount  of  detailed  information  desired,  and  particularly  upon  the 
frequency  with  which  similar  transactions  occur. 

598.  To  organize  the  very  best  system  of  accounts  for  a  particular  business, 
which  will  show  those  results  which  will  be  of  the  greatest  value  in  its  management, 
requires  the  services  of  one  possessed  of  a  high  order  of  accounting  ability,  ."rkill  and 
experience. 


ACCOUNT    BOOKS  187 

CASH   BOOK. 

599.  In  this  book  the  entries  for  all  cash  received  and  all  cash  paid  out  are 
recorded.  It  shows  receipts  and  payments  of  cash.  It  is  used  as  a  posting  medium, 
no  cash  items,  therefore,  being  entered  in  any  other  book, 

600.  All  items  of  cash  received  are  entered  on  the  left  or  debit  side  of  the  cash 
book,  and  are  posted  to  the  right  or  credit  side  of  the  ledger  account  named. 

601.  All  items  of  cash  paid  out  are  entered  on  the  right  or  credit  side  of  the 
cash  book,  and  are  posted  to  the  left  or  debit  side  of  the  ledger  account  named. 

602.  The  difference  between  the  two  sides  of  the  cash  book  shows  the  balance 
of  cash  which  should  be  on  hand,  that  is,  the  cash  in  safe  or  drawer  plus  that  on 
deposit  in  bank.  Cash  should  be  footed  and  proved  daily,  and  the  cash  book 
should  be  ruled  up  at  least  once  monthly,  or,  if  desired,  it  may  be  ruled  up  daily 
or  weekly,      A  simple  form  of  the  cash  book  is  shown  in  illustration  20, 

PURCHASES  BOOK. 

603.  This  book  receives  the  entries  for  all  purchases  of  merchandise.  There 
are  many  forms  of  this  book,  their  purpose,  however,  being  the  same.  Each  party 
from  whom  a  purchase  is  made  is  credited  for  the  amount  in  his  account  in  the  ledger, 
and  "Purchases"  is  debited  for  the  total  amount  of  purchases  for  the  month,  unless 
separate  purchase  accounts  are  kept  for  different  lines  of  goods  handled,  when  a 
special  column  is  kept  for  each  account, 

604.  "Cash  purchases, ' '  aterm  that  is  applied  to  bills  which  are  paid  immediately, 
may  be  disposed  of  in  two  ways,  either  by  entering  the  bill  in  the  usual  way  in 
the  purchase  book  and  the  cash  paid  in  the  cash  book,  checking  the  one  against 
the  other,  or  by  debiting  the  purchases  account  directly  from  the  cash  book,  for 
which  a  special  column  for  that  purpose  may  be  kept,  if  desired. 

SALES  BOOK. 

605.  This  book  receives  the  entries  for  all  sales  of  merchandise  for  which  bills 
are  made  out,  whether  paid  for  at  once  or  later.  This  book  is  also  used  as  a 
posting  medium.  Each  party  to  whom  a  sale  is  made  is  debited  for  the  amount 
of  the  sale  in  his  account  in  the  ledger,  and  the  total  footing  for  the  month  is  posted 
to  the  credit  side  of  the  sales  account  in  the  ledger,  thus  preserving  the  equality 


188  BOOKKEEPING   AND   ACCOUNTANCY 

of  debits  and  credits.  If  separate  sales  accounts  are  kept  for  different  lines  of  goods, 
special  columns  may  be  kept  in  this  book  for  that  purpose.  In  addition,  other 
special  columns,  which  will  be  described  in  the  various  sets  of  this  work,  may  be  used. 

606.  Some  difficulty  is  experienced  by  beginners  in  distinguishing  between 
"cash  sales"  and  sales  that  are  made  on  "terms  cash"  or  for  "spot  cash."  Cash 
sales  refer  to  those  sales  in  which  goods  are  delivered  and  paid  for  at  once,  for  which 
no  account  is  kept  with  the  buyer  in  the  books  of  the  concern,  the  goods  being  de- 
livered and  the  cash  received  as  in  the  case  of  cash  sales  in  retail  stores.  For  cash  sales 
it  is  the  custom  to  make  out  a  cash  slip  or  to  use  a  cash  register,  or  both,  and  at  the 
close  of  each  day's  business  the  total  cash  received  for  cash  sales  must  equal  the  total 
amount  shown  by  the  cash  slips  or  cash  register.  This  amount  is  then  entered 
directly  into  the  cash  book  to  the  credit  of  sales  account,  or  in  a  department  store 
to  the  credit  of  the  several  department  accounts  of  the  business,  if  such  are  kept. 
Cash  sales  are,  therefore,  not  entered  in  the  sales  book. 

607.  Sales  "terms  cash"  or  for  "spot  cash,"  however,  are  treated  differently. 
In  a  wholesale  or  jobbing  house,  "terms  cash"  generally  means  that  cash  may  be 
paid  any  time  within  ten  days,  and  in  many  lines  of  business  within  thirty  or  even 
sixty  days.  "Spot  cash"  generally  means  that  the  goods  are  paid  for  as  soon  as 
sold  and  billed  to  a  customer.  In  either  case,  the  entry  is  made  in  the  sales  book 
the  same  as  if  the  goods  were  sold  on  account.  If  the  cash  is  received  at  once,  the  en- 
tries in  the  cash  book  and  the  sales  book  may  be  checked  one  against  the  other, 
which  debits  cash  and  credits  sales,  without  passing  through  a  personal  account. 
If  the  sale  is  made  to  a  regular  customer,  however,  it  is  the  rule  to  pass  the  transac- 
tion through  his  account  by  debiting  him  in  the  sales  book  and  crediting  him  in  the 
cash  book. 

NOTE  AND  ACCEPTANCE  BOOKS. 

608.  The  notes  receivable  hook  and  notes  payable  hook  are  kept  to  show  a  record, 
in  detail,  of  all  the  notes  and  acceptances  received  and  issued.  These  books  are 
designed  to  show  all  the  particulars  pertaining  to  each  paper  in  a  compact  form  for 
ready  reference,  especially  as  to  its  date,  maturity,  the  parties  thereto,  and  its 
final  disposition.  These  books  are  used  as  posting  mediums,  all  entries  being 
posted  directly  to  the  ledger,  although  they  may  be  posted  through  the  journal. 
When  used  as  posting  mediums,  the  total  of  the  notes  and  acceptances  received  and 
issued  for  the  month  or  other  period  are  posted  to  their  proper  accounts  in  the  led- 
ger, the  several  contra  entries  being  posted  to  the  different  accounts  named. 


ACCOUNT   BOOKS  180 

THE  JOURNAL. 

609.  This  book  is  kept  to  receive  only  such  entries  as  cannot  properly  be  made 
in  any  other  book.  It  may  include  special  columns  for  different  purposes,  although 
many  forms  of  this  book,  which  were  once  quite  popular  (for  instance,  the  six-column 
journal,  the  special  columns  of  which  have  been' nullified  by  the  cash,  purchase, 
sales  and  other  books)  are  now  almost  obsolete.  However,  the  journal  still  remains 
an  important  book,  and  in  many  lines  of  business  is  susceptible  of  great  utility  by 
the  introduction  of  special  columns. 

610.  The  cash  journal  is  a  combination  of  the  cash  book  and  journal,  v/hich 
is  very  popular  in  some  lines  of  business.  It  is  fully  illustrated  in  one  of  the  sets 
accompanying  this  work. 

OTHER  BOOKS. 

611.  There  are  many  other  books  in  common  use  in  which  transactions  are 
recorded,  each  usually  designated  by  a  name  indicating  the  purpose  for  which  it  is 
kept,  such  as  the  voucher  register  when  the  voucher  system  is  used,  the  commission 
sales  book  or  ledger  and  account  sales  register  used  in  commission  houses,  the  time 
book,  pay  roll  book,  cost  book,  and  many  others  used  in  manufacturing  lines,  and 
a  number  of  special  books  used  in  banking  and  financial  concerns,  which  are  fully 
described  in  the  various  sets  illustrating  the  various  lines  of  business. 

THE  LEDGER. 

612.  As  described  in  ][  17,  this  is  the  book  of  accounts.  It  is  the  book  to  which 
the  items  and  totals  of  the  various  books  in  which  transactions  are  classified  and 
recorded  are  transferred.  It  is  from  this  book  that  the  trial  balance  is  taken,  and 
it  is  from  the  trial  balance  that  the  trading  and  profit  and  loss  statements,  the 
statement  of  resources  and  liabilities,  and  other  statements  which  show  the  results 
of  the  business  for  the  fiscal  period  covered  are  prepared. 

613.  Ledger  accounts  may  be  classified  as  general  accounts,  accounts  receivable, 
accounts  payable,  etc.  The  general  accounts  may  be  kept  separately  in  a  general 
ledger,  or  these  accounts  may  be  again  sub-divided  into  those  kept  in  a  general 
ledger  and  those  kept  in  a  private  ledger,  the  private  ledger  usually  containing 
those  accounts  which  show  the  proprietary  interests  of  the  o^vTiers  of  the  business. 
Accounts  receivable  may  be  kept  in  a  separate  ledger  known  as  a  sales  ledger,  and 
the  sales  ledger  may  again  be  sub-divided  into  a  city  ledger  and  a  country  ledger,  or 
an  Eastern  ledger  and  a  Western  ledger,  or,  where  there  are  many  accounts,  several 
ledgersmay  be  kept,  as ''Ledger  A  toM, "  "  Ledger  N  to  Z,"etc.  Accounts  payable 
may  be  kept  in  a  separate  purchase  ledger.     In  banks,  the  account/S  wjth  depositorg 


190  BOOKKEEPING   AND   ACCOUNTANCY 

are  kept  in  a  ledger  known  as  the  individual  or  depositor's  ledger.  A  number 
of  ledgers  may  also  be  kept  for  these  accounts  in  divisions  of  the  letters  of  the 
alphabet. 


CLOSING   THE  LEDGER. 

614.  This  is  a  term  used  to  express  the  closing  of  the  books  at  the  end  of  each 
fiscal  period,  which  is  usually  once  a  year,  although  books  may  be  closed  every 
three  or  six  months,  or  even  monthly,  which,  however,  is  unusual.  "Closing  the 
books"  is  another  term  used  to  indicate  the  same  proceeding.  The  purpose  of  clos- 
ing the  ledger,  as  stated  in  1[247  and  ^447,  is  to  indicate  the  close  of  a  business  period, 
and  thus  to  eliminate  all  open  current  trading  and  profit  and  loss  accounts  in  the 
ledger  preparatory  to  their  receiving  the  entries  of  a  new  business  period.  Accounts 
showing  resources  and  liabilities  and  those  showing  fixed  reserve,  surplus,  sinking 
fund  or  other  similar  accounts  are  not  closed  except  in  the  following  cases:  (a)  when 
an  adjustment  of  the  account  has  been  made  and  it  is  desired  to  show  the  cor- 
rect balance  in  one  amount,  and  (6)  when  the  space  allotted  to  an  account  is  filled 
and  it  is  necessary  to  forward  it  to  another  page  or  to  a  new  ledger.  This  applies 
to  all  excepting  the  cash  account,  which  is  usually  balanced,  footed  and  ruled  and 
the  balance  carried  down  or  forward  at  least  once  monthly.  When  it  becomes  nec- 
essary to  forward  an  account  showing  a  resource  or  a  liability  to  a  new  page  or  a 
new  ledger,  only  the  balance  shown  by  the  account  should  be  forwarded  and  not 
the  footings. 

615.  Preparatory  to  closing  the  ledger,  all  inventories  should  be  taken  and  ad- 
'asting  entries  for  them  and  for  any  other  items  should  be  made,  after  which  the  final 
trial  balance  is  taken.  The  various  trading  and  profit  and  loss  statements  and  the 
statement  of  resources  and  liabilities  are  then  prepared  and  proved,  after  wnicL 
the  entry  or  entries  to  close  the  trading,  the  profit  and  loss,  and  such  other  accounts 
as  are  to  be  closed,  and  to  distribute  the  net  profit  or  the  net  loss  to  the  proper 
accounts,  are  made  up  and  entered  in  the  journal.  When  the  items  of  the  closing 
entry  or  entries  have  been  posted,  and  the  accounts  footed  and  ruled,  the  ledger 
will  again  be  in  its  primal  condition,  showing  open  accounts  which  should  agree 
with  those  shown  by  the  statement  of  resources  and  liabilities.  The  ledger  is  then 
ready  to  receive  entries  for  the  next  succeeding  fiscal  period. 

ERRORS  IN  TRIAL  BALANCES. 

616.  This  subject  may  be  discussed  to  best  advantage  under  three  heads: 
(1)  preventing  errors,  (2)  finding  errors,  (3)  correcting  errors.  It  is  better  to  be 
expert  in  avoiding  errors  than  expert  in  detecting  them. 


ERRORS   IN    TRIAL    BALANCES  191 

616a.  Preventing  errors.  One  source  of  errors  is  in  posting  to  the  wrong  side 
of  accounts.  These  errors  can  be  prevented  to  a  large  extent  by  posting  the  debits 
first  and  afterwards  the  credits  from  each  book.  Another  plan  is  to  have  the  pages 
or  books  from  which  debit  items  are  posted  paged  in  even  numbers,  and  the  pages 
or  books  from  which  credit  items  are  posted  paged  in  odd  numbers.  Under  this 
plan,  the  sales  book,  and  the  credit  side  of  the  cash  book,  which  contains  debit 
items,  would  be  paged  in  odd  numbers,  as  1,  3,  5,  7,  etc.,  while  the  purchase  book, 
and  the  debit  side  of  the  cash  book,  which  contains  credit  items,  would  be  paged  in 
even  numbers  such  as  2,  4,  6,  8,  etc.  Other  books  containing  separate  debit  and 
credit  items  should  be  paged  accordingly.  When  the  posting  books  have  been  thus 
paged  "odd  and  even,"  as  suggested,  all  page  numbers  on  the  debit  side  of  the  ledger 
should  show  odd  numbers,  and  those  on  the  credit  side  should  show  even  numbers. 
In  case  of  an  error,  a  rapid  examination  through  the  ledger  will  quickly  show  an 
item  that  has  been  posted  to  the  wrong  side  of  an  account. 

6166.  In  forwarding  footings  in  posting  books,  or  from  one  account  to  another 
in  the  ledger,  care  should  be  observed  to  place  them  in  the  proper  columns  without 
transposing  the  figures.  Transposition  of  figures  is  a  very  common  source  of  error 
in  posting  and  forwarding  amounts.  Various  methods  and  check  systems  for  find- 
ing a  transposition  of  figures  have  been  suggested,  but  none  of  them  are  absolutely 
certain,  and  many  of  them  require  an  amount  of  work  which  makes  them  impractic- 
able. They  have  been  superseded  by  systematic  checking  methods  which  are 
more  practical,  one  of  which  is  hereafter  described. 

616c.  Finding  errors.  Too  much  importance  cannot  be  attached  to  apareful 
checking  of  each  day's  postings.  The  simplest  method  of  checking  is  described  in 
^  456.     One  of  the  very  l)est  methods  of  checking  is  given  below. 

616rf.  Reverse  checking  or  proof  posting.  This  method  may  be  used  in  connec- 
tion with  any  set  of  books,  however  large  or  small.  It  avoids  the  use  of  "check 
figures,"  or  any  of  the  more  or  less  complicated  schemes  and  devices  so  frequently 
met  with,  and  if  carried  out  as  indicated  will  make  errors  in  posting  practically 
impossible.  The  plan  is  as  follows :— only  one  book  is  posted  to  the  ledger  at  a 
time.  As  each  item  is  posted  to  its  ledger  account,  a  slip  of  paper  (say  two  by  six 
inches  in  size)  is  inserted  at  the  account,  with  the  end  of  the  slip  protruding  slightly 
at  the  top  of  the  book.  When  the  posting  from  each  book  is  completed,  beginning 
with  the  first  slip  in  the  ledger,  each  unchecked  item  in  the  ledger  is  entered  on  a 
sheet  of  paper  ruled  in  columns  and  known  as  a  "check  sheet."  As  each  item  is 
transferred  to  the  check  sheet,  it  is  checked  on  the  ledger  account.  When  all  the 
items  posted  have  been  entered  on  the  check  sheet,  it  is  footed  and  the  sum  of  the 
items  on  the  check  sheet  must  equal  the  sum  of  the  items  posted,  as  shown  by  the 
footing  of  the  column  in  the  posting  book.  The  totals  of  each  succeeding  day  are 
added  to  the  footing  of  the  previous  day  on  the  check  sheet,  so  that  at  the  end  of 
the  month  the  total  footing  of  the  check  sheet  must  equal  the  total  footing  shown 


192  BOOKKEEPING   AND   ACCOUNTANCY 

in  the  posting  book.  Any  omissions  in  posting  or  transpositions  of  figures  are  at 
once  discovered  by  this  method,  and  if  ordinary  care  is  exercised,  accounts  posted  to 
the  wrong  side  of  the  ledger  will  also  be  discovered.  If  more  than  one  item  is  posted 
to  the  same  account  from  the  same  book,  a  separate  slip  should  be  inserted  for  each 
item.  Separate  check  sheets  should  be  kept  for  each  posting  book.  These  sheets 
are  generally  known  as  "cash  check  sheets,"  "sales  check  sheets,"  etc. 

616e.  The  adding  machine  may  be  used  very  advantageously  to  prove  postings, 
whether  to  principal  or  subsidiary  ledgers,  in  connection  with  the  method  of  reverse 
checking  and  proof  posting  explained  in  the  preceding  paragraph .  When  the  month- 
ly trial  balance  is  "out",  the  adding  machine  may  be  used  to  prove  the  postings 
from  any  book  by  finding  the  sum  of  all  the  postings  from  that  book  found  in  the 
ledger  for  the  month.  In  like  manner  the  controlling  account  for  any  subordinate 
ledger. may  be  proved. 

616/.  When  credits  to  customers'  accounts,  which  are  generally  made  to  cover 
a  specified  bill  or  bills,  are  posted,  if  canceling  items  on  each  side  of  the  account 
are  carefully  compared  and  indicated  by  placing  a  small  cross-mark  or  letter  to  the 
left  of  the  amounts,  it  will  generally  discover  any  errors  which  have  been  made  in 
entering  the  WTong  amount,  while  it  leaves  the  account  in  the  best  shape  to  quickly 
ascertain  the  correctness  of  subsequent  payments  on  the  account. 

616g.  Correcting  errors.  When  an  error  is  found,  it  should  never  be  corrected 
by  an  erasure.  If  an  item  has  been  posted  to  the  wrong  side  of  an  account,  or  if 
the  wrong  amount  has  been  posted,  a  red  line  should  be  ruled  through  the  amount 
and  the  proper  entry  made.  When  necessary,  adjusting  entries  in  the  journal  may 
be  made.  Such  entries,  however,  should  contain  a  full  and  explicit  statement  of 
the  error  and  of  the  correction  made,  so  that  at  any  time  it  would  be  perfectly  under- 
stood. 


CORPORATIONS. 

617.  A  Corporation  was  defined  by  Chief  Justice  Marshall  as  "an  artificial 
being,  invisible,  intangible,  and  existing  only  in  contemplation  of  law."  It  is 
sometimes  termed  an  "artificial  person." 

617a.  Corporations  are  necessary  to  provide  a  convenient  means  of  combining 
the  funds  which  a  number  of  individuals  may  have  for  investment,  in  order  to 
supply  the  capital  required  to  conduct  and  carry  on  large  commercial  and  indus- 
trial enterprises  without  requiring  those  who  contribute  this  capital,  whether  in 
large  or  in  small  amounts,  to  assume  the  responsibilities  and  liabihties  of  the 
ordinary  partner;  consequently,  laws  have  been  enacted,  by  the  legislatures  of 
the  different  states  creating  for  corporations  a  separate  legal  existence,  and  extend- 
ing to  stockholders  certain  privileges  and  exemptions  from  liability,  and  other 
advantages  which  caiinot  be  secured  in  the  ordinary  partnership  relation.  Cor- 
porations, as  a  rule,  may  be  formed  for  any  legitimate  purpose. 

6176.  Corporations  are  created  in  two  ways,  by  charter  and  by  general  statute. 
When  created  by  charter,  a  special  act  must  be  passed  for  each  corporation,  which  is 
known  as  its  charter.  This  charter  defines  its  powers  and  privileges.  When  cre- 
ated by  general  statute,  all  that  is  necessary  is  to  comply  with  the  provisions  of 
the  statute,  which  defines  its  powers  and  privileges.  Nearly  all  corporations  are 
now  created  by  general  statute,  and  very  few  by  special  charter. 

617c.  The  method  of  procedure  in  forming  a  corporation  by  general  statute  is 
very  simple.  The  required  number  of  individuals  (not  less  than  two  and  usually 
not  less  than  five)  join  in  a  written  instrument  known  as  "Articles  of  Incorpora- 
tion," which,  when  properly  acknowledged  before  some  competent  officer,  is  sub- 
mitted to  the  judge  of  a  court  for  his  examination  as  to  whether  or  not  it  conforms 
with  the  law  creating  it,  and  when  properly  approved  and  certified  by  him  it 
becomes  a  certificate  of  incorporation,  the  act  under  which  the  corporation  is 
formed  being  its  charter.  After  this  certificate  is  properly  recorded  the  corpora- 
tion is  formed,  and  when  by-laws  are  adopted  and  the  board  of  directors  and 
officers  are  elected  the  corporation  is  ready  to  proceed  in  conducting  the  business 
for  which  it  was  created. 

Note — The  legal  part  of  the  formation  of  a  corporation  should  invariably  be  entrusted  to 
an  attorney. 

618.  Terms  and  definitions.  There  are  certain  terms  and  definitions  used 
in  connection  with  corporations  with  which  you  should  be  familiar.  Some  of 
them  are  here  described. 

619.  The  capital  stock  is  the  amount  of  stock  authorized  by  the  charter 
or  certificate  of  incorporation,  at  its  par  value.  The  paid-in  capital  is  the 
amount  paid  on  the  subscribed  shares  of  stock  by  the  stockholders. 

193 


194  BOOKKEEPING   AND   ACCOUNTANCY 

620.  Treasury  stock  is  stock  of  a  corporation  which  has  been  previously 
issued  to  stockholders,  and  is  later  purchased  from  the  funds  of  the  corpora- 
tion or  is  secured  by  donation  or  gift.  Unissued  shares  of  the  authorized  capital 
stock  must  not  be  considered  as  treasury  stock.  Treasury  stock  does  not 
participate  in  dividends.  "Treasury  stock  is  the  stock  of  a  company  issued  as 
fully  paid,  which  subsequently  comes  back  to  the  company:  (a)  as  settlement 
of  an  account  due  the  company;  (6)  as  a  purchase  by  the  company;  or  (c)  as  stock 
donated  for  working  capital." 

621.  The  stockholders  of  a  corporation  are  the  individuals  who  own  the 
property  of  the  corporation,  each  stockholder's  interest  being  measured  by  the 
number  and  value  of  the  shares  he  holds. 

621a.  A  stock  certificate  is  a  document  issued  by  the  corporation  to  each 
stockholder,  certifying  that  he  is  the  owner  of  a  certain  specified  number  of  shares 
of  the  capital  stock  of  a  specified  par  value. 

622.  The  board  of  directors  is  elected  by  the  stockholders  and  represents 
them.  It  is  vested  with  the  management  and  direction  of  all  the  affairs  of  the 
corporation  through  its  officers,  who  are  generally  elected  from  among  its  own 
number.  These  officers  are  usually  a  president,  vice-president,  secretary,  and 
treasurer,  whose  duties  are  defined  in  the  by-laws. 

623.  The  president  is  the  chief  executive  officer,  who  presides  at  the  meet- 
ings of  the  board  and  ordinarily  exercises  the  authority  of  the  board  when  it  is 
not  in  session. 

624.  The  secretary  keeps  the  official  records  of  the  corporation.  He  is 
custodian  of  and  is  responsible  for  the  charter  and  seal  of  the  corporation,  and 
for  the  minute  book  and  the  various  other  books  containing  the  records  relating 
to  the  stockholders  of  the  corporation.     The  most  important  of  these  books  are: 

(a)  The  minute  hook,  in  which  is  recorded  the  proceedings  of  all  the  meetings  of  the  stock- 
holders and  of  the  board  of  directors.  This  record  should  be  most  complete,  as  the  officers  must 
look  to  it  for  the  necessary  authority  to  conduct  the  affairs  of  their  respective  offices,  and  in 
case  of  litigation  it  is  taken  as  prima  facie  evidence  for  the  acts  of  the  board  of  directors  and 
officers.  It  should  contain  the  by-laws  of  the  corporation,  and  the  minutes  of  each  meeting 
should  be  signed  by  the  secretary  and  also  by  the  president. 

(6)  The  stock  certificate  book  is  a  book  of  printed  certificates,  with  stubs,  which  are  filled 
out  and  issued  to  the  stockholders. 


DIFFERENCES    BETWEEN    PARTNERSHIPS   AND    CORPORATIONS  195 

(c)  The  transfer  hook,  or  journal,  receives  entries  for  all  transfers  of  stock  from  one  stock- 
holder to  another  and  from  it  the  proper  entries  are  made  in  the  different  accounts  in  the  stock 
ledger.  Entries  for  the  original  certificates  issued  may  be  entered  in  this  book  also,  and  posted 
from  it  to  the  stock  ledger.  When  this  is  done,  the  amount  of  the  original  stock  issued  should 
be  charged  to  "Capital  Stock  Issued"  account  in  the  stock  ledger,  which  would  then  show  a 
debit  balance  equal  to  the  credit  balance  shown  by  the  capital  stock  account  in  the  general 
ledger,  as  well  as  the  sum  of  the  credits  to  the  various  stockholders'  accounts  in  the  stock  ledger, 
thus  making  the  stock  ledger  self-balancing. 

(d)  The  stock  ledger  contains  the  accounts  with  the  different  stockholders,  and  shows  the 
number  and  the  par  value  of  the  shares  of  stock  owned  by  each.  It  is  a  subol"dinate  ledger,  of 
which  the  capital  stock  account  in  the  general  ledger  is  the  controlling  account.  It  receives 
its  entries  from  the  stock  certificate  book  and  from  the  transfer  book.  From  the  stock  book, 
each  stockholder  is  credited  for  the  number  of  shares  and  the  par  value  of  the  stock  issued  to 
him.  From  the  transfer  book,  he  is  debited  for  the  number  of  shares  and  the  par  value  of  stock 
transferred  by  him  toothers.  The  balance  shown  by  each  account  is  the  par  value  of  the 
stock  owned  by  the  stockholder. 

(e)  The  dividend  book  is  kept  to  show  the  dividends  declared  and  paid  to  each  stockholder. 
A  dividend  is  a  certain  percentage  declared  on  the  capital  stock  to  be  paid  from  the  surplus 
earnings  of  the  company. 

625  The  treasurer  is  the  financial  officer  of  the  corporation.  He  is  usually 
the  custodian  of  and  is  responsible  for  all  the  funds  of  the  corporation.  The  ordi- 
nary books  of  account  in  which  is  recorded  the  gsneral  business  of  the  company 
are  kept  in  his  office.  It  should  be  remembered  that  the  books  of  the  secretary 
and  those  of  the  treasurer  are  distinct  and  separate,  although  the  duties  of  one, 
either  in  whole  or  in  part,  may  be  and  frequently  are  performed  by  the  other,  to 
suit  the  requirements  of  a  particular  business  or  as  required  by  the  board  of 
directors  or  by  the  by-laws. 


SOME  DIFFERENCES  BETWEEN   PARTNERSHIPS  AND  CORPORATIONS. 

626.  Formation.  A  partnership  is  an  association  of  two  or  more  persons 
for  the  purpose  of  conducting  a  business  and  sharing  in  the  profits  and  losses 
accruing,  with  all  the  powers  and  privileges  under  the  law  that  each  partner 
enjoys  as  an  individual.  A  corporation  is  an  association  of  individuals  authorized 
by  law  to  act  as  a  single  person,  with  powers  and  privileges  restricted  to  those 
definitely  set  forth  in  its  special  charter  or  in  the  general  corporation  statute 
(act)  under  which  it  is  formed. 

627.  How  formed.  A  partnership  is  formed  by  an  agreement  (either 
written  or  verbal)  between  two  or  more  persons  to  contribute  capital,  ability  or 
service,  or  all  of  them,  for  a  certain  purpose,  and  the  associated  partners  are 
known  as  a  firm.     A  corporation  is  formed  by  the  association  of  two  or  more  per- 


196  BOOKKEEPING   AND   ACCOUNTANCY 

sons  under  a  special  charter  or  under  a  certificate  of  incorporation  issued  by  some 
officer  of  the  state,  in  accordance  with  the  general  or  special  law  under  which  it  is 
created,  and  is  usually  designated  as  a  company. 

628.  Liability.  In  a  partnership  each  partner  is  liable  for  all  the  debts  of 
the  firm.  In  a  corporation  each  stockholder  is  liable  only  for  such  an  amount  as 
is  defined  by  law,  which  is  usually  the  amount  of  his  stock,  but  always  in  propor- 
tion to  his  share  in  the  capital  stock  of  the  corporation. 

629.  Contuiuation.  A  partnership  continues  until  the  expiration  of  the 
time  agreed  upon  for  dissolution  or  until  the  death  or  legal  disability  of  one  of 
the  partners.  A  corporation  continues  until  the  expiration  of  its  charter,  which 
may  be  perpetual.  The  death  or  disability  of  a  stockholder  does  not  affect  a 
corporation. 

630.  Powers.  A  partnership  has  no  restrictions  that  the  individuals 
composing  it  do  not  have,  and  it  may  engage  in  any  line  of  business  so  long  as  it  is 
legal.  A  corporation  is  restricted  to  the  performance  of  only  such  acts  as  are  nec- 
essary to  conduct  the  particular  business  or  accomplish  the  particular  purpose  for 
which  it  was  created. 

631.  By  whom  conducted.  The  affairs  of  a  partnership  are  conducted  by 
the  members  of  the  firm,  or  such  of  them  or  their  agents  as  are  so  authorized  by 
the  agreement  between  the  partners.  The  affairs  of  a  corporation  are  transacted 
only  through  the  officers  elected  by  the  stockholders,  or  their  legal  representatives, 
as  authorized  and  defined  by  the  charter  and  by-laws,  who  act  as  agents  of  the 
corporation. 

CORPORATION  ACCOUNTS. 

632.  The  accounts  of  a  corporation  are  in  no  way  different  from  those  of  a 
firm  or  an  individual  proprietor  in  so  far  as  they  relate  to  the  routine  transactions 
of  the  business  conducted,  but  there  are  a  number  of  accounts  necessitated  by  the 
requiremencs  of  corporate  ownership  which  are  found  only  in  connection  with 
corporation  accounting  and  are  not  found  elsewhere.  These  accounts  relate  to 
the  investments  of  the  stockholders  and  the  distribution  of  profits. 

633.  Capital  stock  account.  This  account,  in  a  way,  corresponds  with  the 
capital  account  of  a  proprietor  or  partner,  since  it  is  an  ownership  account  (read 
^55,  586),  and  shows  the  par  value  of  the  stock  owTied  by  the  stockholders; 
but  it  is  not  affected  by  the  gains  or  losses  of  the  business,  which  are  shown  in 
undivided  profits,  surplus,  and  other  similar  accounts,  nor  by  the  purchase  and 
sale  of  the  stock  between  the  stockholders. 


CORPORATION   ACCOUNTS  197 

Paragraph  663 — Continued. 

o.     It  is  credited  for  the  par  value  of  the  stock  issued,  up  to  the  amount  of  the  authorized 

stock. 

b.  It  is  debited,  when  the  capital  stock  is  reduced,  for  the  amount  of  shares  retired  and 
canceled,  at  their  par  value. 

c.  The  balance  shows  the  amount  of  stock  of  the  corporation,  at  its  par  value,  in  the  hands 
of  its  stockholders,  and  it  should  equal  the  sum  of  the  balances  shown  by  the  accounts  with  the 
different  stockholders  in  the  stock  ledger.  If  treasury  stock  is  held,  its  par  value  must  be  added 
to  the  sum  of  the  balances  in  the  stock  ledger  to  equal  the  balance  of  the  capital  stock  account. 
Capital  stock  represents  a  secondary  liability  of  the  corporation. 

Note — It  should  be  credited  only  for  the  actual  stock  issued,  and  not  for  the  total  author- 
ized capital  stock  unless  all  of  it  has  been  issued. 

634.  Treasury  stock  account.  This  account  shows  the  amount  of  the  capi- 
tal stock  of  the  corporation  previously  issued  to  stockholders,  which  has  been 
secured  from  them  by  purchase,  gift  or  donation. 

a.  It  is  debited  for  the  coft  of  all  treasury  stock  purchased  by  the  corporation  or  for  the 
market  value  of  stock  received  by  gift  or  donation. 

b.  It  is  credited  when  treasury  stock  is  disposed  of,  for  the  cost  of  the  stock  if  purchased 
or  for  the  market  value  of  the  stock  if  received  by  gift  or  donation.  If  sold  for  more  or  less  than 
the  price  charged  in  the  account,  surplus  account  should  be  debited  or  credited  for  the  differ- 
ence between  that  price  and  the  selling  price.  If  the  stock  is  retired  and  canceled,  credit  the 
account  for  the  amount  for  which  it  was  debited  when  the  stock  was  received,  and  debitor 
credit  surplus  account  with  the  difference  between  that  amount  and  the  par  value  of  the  stock 
retired,  debiting  capital  stock  account  for  the  par  value  of  the  stock  retired  and  canceled. 

c.  The  balance  shows  either  the  cost  or  the  market  value  of  the  treasury  stock  on  hand, 
which  is  a  resource. 

Note— Treasury  stock  does  not  participate  in  dividends  declared,  and  in  many  states  the 
purchase  of  its  own  stock  by  corporations,  as  treasury  stock  or  otherwise,  is  forbidden. 

635.  Subscription  Account.  This  account  is  opened  to  show  the  par  value 
of  stock  which  has  been  subscribed  but  not  issued.  It  is  credited  at  par  value  for 
the  amount  of  stock  subscribed  and  not  issued  at  that  time;  it  is  debited  for  such 
stock  when  finally  issued.  The  balance,  if  any,  shows  the  par  value  of  sto&k 
subscribed  but  not  issued. 

636.  Reserve,  surplus  and  undivided  profits  accounts.  (Read  ^[557  to  557d 
inclusive,  page  167.) 


198  bookkeeping  and  accountancy 

Accounts  Debited  and  Credited  in  Connection  with  Transactions 
Relating   to  the  Stockholders  of  a   Corporation. 

637.  In  disposing  of  the  transactions  relating  to  stockholders  in  the  books 
of  a  corporation,  the  names  of  the  accounts  to  be  debited  and  credited  are  given, 
following  each  proposition  stated: 

a.     Where  stock  is  subscribed  and  immediately  paid  for: 
Cash,  Dr.  For  par  value  of  the  stock  sold. 

Capital  Stock,  Cr. 

h.     Where  stock  is  subscribed  and  not  all  paid  for  at  one  time: 
Subscriber,  Dr.  For  total  amount  of  stock  subscribed,  at  par 

Subscription  %,  Cr.  value. 

c.  When  part  of  the  subscription  price  is  paid  when  stock  is  subscribed,  or  when  part  is 
paid  later: 

Cash,  Dr.  For  the  amount  paid  in  cash  or  otherwise. 

To  Subscriber,  Cr. 

d.  When  subscribed  stock  has  been  paid  for  in  full  and  the  stock  issued : 
Subscription  %,  Dr.  For  the  amount  of  stock  issued,  at  par  value. 

Capital  Stock  %,  Cr. 

e.  When  stock  is  subscribed  and  payment  made  by  cash,  notes  and  property,  i.e.,  if  A,  B, 
and  C  each  subscribed  for  twenty  shares  of  D  Company  stock,  par  value  $2000 — A  pays  cash, 
B  pays  half  cash  and  the  balance  by  note  at  thirty  days,  and  C  deeds  to  the  company  land 
appraised  at  $2000: 

Cash,  Dr $2000  For  amount  of  stock  issued  and  paid  f  jr,  at 

Capital  Stock,  Cr $2000  par  value,  by  A. 

Cash,  Dr 1000  For  amount  of  stock  issued  and  paid   for, 

Notes  Rec,  Dr 1000  at  par  value,  by  B— one-half  cash  and  one- 
Capital  Stock,  Cr 2000                half  note. 

Land,  or  Real  Estate,  or  Cost 

of  Property,  Dr 2000  For  amount  of  stock  issued  and   paid  for, 

Capital  Stock,  Cr 2000  at  par  value,  by  C,  in  land. 

In  like  manner,  if  the  stock  was  paid  for  by  a  patent  right,  machinery,  services  or  other 
value,  a  corresponding  account,  under  an  appropriate  title,  that  would  clearly  set  forth  the 
nature  of  the  transaction  should  be  debited,  such  as  "Patent  Rights"  %,  "Machinery"  %, 
"Cost  of  Property"  %.  etc. 

/.     E,  F,  and  G  are  partners.  They  decide  to  incorporate  their  business,  each  taking  stock 

for  his  interest  in  the  old  concern.  If  the  business  is  to  be  recorded  in  the  old  books,  the  entry 
to  adjust  is: 

^'  ^^-  Each  for  the  amount  of  his  net  capital  in  the 

^  >  ^^-  firm,  for  which  he  has  received  stock  in  the 

^>  -L^f-  new  company  at  par. 

Capita]  Slock,  Cr. 


CORPORATION   ACCOUNTS  199 

If  they  desire  to  open  a  ne\  •  set  of  books,  the  accounts  shown  by  the  staitement  of  resources 
and  liabiUties  would  be  debited  and  credited  for  the  amounts  shown  therein,  in  connection 
with  the  entry  shown  above. 

If  stock  was  sold  to  additioi  al  stockholders,  the  entry  would  in  every  way  be  similar  to 
those  given  in  previous  examples  under  like  conditions. 

g.  H  and  I  are  partners,  each  with  a  net  capital  of  $25,000  ^hown  in  their  capital  accounts. 
They  decide  to  incorporate  with  a  capital  stock  of  $100,000,  of  which  they  are  to  receive  $75,000 
par  value  in  payment  of  their  interest  in  the  former  business,  represented  by  their  capital 
stock,  the  $25,000  being  for  good-wiil.  The  remaining  $25,000  was  disposed  of  to  outsiders,  at 
par  value.     The  entry  to  adjust  is: 

H,  Cap.  %,  Dr $25,000  To  close  capital  % 

I,  Cap.  %,  Dr 25,000  To  close  capital  % 

Good-will,  Dr 25,000  To  open 

Gash,  Dr 1' 5,000  To  transfer  to  new  books 

Capital  Stock,  Cr $100,000 

"Cost  of  Property"  is  a  term  that  is  used  to  designate  the  difference  between  the  current 
assets  and  liabilities  of  a  business  or  prop(Tty  purchased  and  the  purchase  price.  Oftentimes, 
when  it  is  desired  to  state  the  assets  purchased,  at  their  cost,  on  the  books  of  the  company,  it 
is  necessary  to  set  up  an  account  called  ".Reserve  for  Capital  Investment."  This  reserve  is 
sometimes  referred  to  as  "Capital  Reserve.' ' 

h.  Where  both  common  and  preferred  s'ock  are  issued  to  stockholders,  their  sum  equaij 
the  capital  stock  of  the  company,  although  separate  accounts  are  opened  for  each;  for  instance, 
in  example  g,  if  the  capital  stock  of  $100,000  was  divided  into  $50,000  preferred  stock,  $50,000 
of  common  stock,  instead  of  capital  stock  beii'g  credited,  preferred  stock  would  be  credited 
$50,000,  and  common  stock  $50,000. 

i.  When  stock  is  sold  at  a  discount,  i.e.,  if  J  and  K  purchase  ten  shares  of  stock,  par  value 
$100,  at  $75  per  share,,  if  the  shares  are  paid  for  in  cash  the  entry  is: 

Cash,  Dr $1500 

Discount  on  Stock  Sold,  Dr 500 

Capital  Stock,  Cr $20a') 

j.     In  the  above  transaction,  if  one-half  is  to  be  paid  in  cash,  the  entry  is: 

J,  Dr $750 

K,  Dr 750 

Discount  on  Stock  Sold,  Dr 500 

Subscription  %,  Cr $2000 

As  the  stock  is  paid  for,  "Cash"  is  debited  and  J  and  K  credited.     When  each  has  paid 
$750  for  the  stock  and  it  is  issued,  the  entry  to  adjust  is: 
Subscription  %,  Dr $2000  For  the  par  value  of  the  stock  issued. 

Capital  Stock,  Cr $2000 

Note — The  preceding  examples  illustrate  the  simpler  entries  required  in  opening  the  stock- 
holders' accounts  of  a  corporation.  In  these  days  of  holding  companies,  subsidiary  companies, 
and  the  many  other  combinations  in  corporate  ownership,  there  are  many  conditions  contin- 
ually arising  which  require  special  treatment  at  the  hands  of  the  accountant.  This,  therefore, 
is  a  subject  which  properly  belongs  to  the  moFt  advanced  part  of  higher  accounting  work 
and,  consequently,  la  omitted  in  this  text. 


200  BOOKKEEPING   AN)V  ACCOUNTANCY 


MANUFACTURING  ACCOUNTS. 

638.  Commercial  and  industrial  pursuits  may  be  divided  into  two  classes: 
those  of  traders  or  distributors,  who  are  known  as  merchants,  and  those  of  makers 
or  producers,  who  are  known  as  manufacturers. 

639.  The  merchant  buys  and  sells;  the  manufacturer  mafces  and  sells,  i.e., 
the  merchant  buys  and  sells  the  finished  product,  while  the  manufacturer  buys 
the  materials  and  hires  the  labor  to  turn  these  materials  into  the  finished  product 
which  he  sells  to  the  merchant.  Sometimes  the  manufacturer  acts  as  his  own 
merchant  or  distributor  by  selling  his  product  directly  to  the  user  or  the  consumer, 
just  as  occasionally  the  merchant  may  manufacture  some  part  of  that  which  he 
sells. 

640.  Just  as  the  principal  profit  of  a  mercantile  or  trading  business  is  derived 
from  the  purchase  and  sale  of  commodities  and  is  ascertained  from  that  group  of 
accounts  known  as  trading  accounts,  so,  in  like  manner,  the  principal  profit  of  a 
manufacturing  or  industrial  business  is  derived  from  the  manufacture  and  sale 
of  commodities,  the  cost  of  manufacture  being  ascertained  from  that  group  of 
accounts  known  as  manufacturing  accounts.  The  cost  of  finished  goods  sold 
in  a  manufacturing  business  corresponds  with  the  "cost  of  merchandise  sold"  in  a 
trading  business,  the  only  difference  being  that  in  one  case  the  concern  makes  the 
goods  and  in  the  other  it  buys  them  already  made.  Similarly,  the  gross  trading 
profit  shown  by  the  trading  accounts  of  a  merchant  corresponds  with  the  gross 
profit  from  sales  shown  by  the  accounts  of  a  manufacturing  concern. 

641.  WhUe  there  are  marked  similarities  between  trading  and  manufac- 
turing accounts,  as  indicated  in  the  preceding  paragraph,  they  differ  in  some  im- 
portant respects  owing  to  the  great  difference  in  the  elements  of  cost  entering 
into  the  manufacture  of  goods  and  the  corresponding  difference  in  the  units  of 
information  desired.  While  the  accounts  of  a  small  factory  may  be  very  simple, 
in  large  establishments,  where  every  detail  of  cost  and  expense  must  be  shown, 
elaborate  systems  must  be  installed  which  exemplify  the  highest  expressions  of 
scientific  aiccountancy,  and  for  that  reason  manufacturing  accounts,  cost  systems, 
etc.,  are  of  special  interest. 

ELEMENTS  OF  COST. 

642.  There  are  three  principal  elements  of  cost  in  manufacturing,  namely: 
the  cost  of  materials,  the  cost  of  labor,  and  the  cost  of  manufacturing  expenses. 
The  items  showing  these  costs  are  entered  into  corresponding  accounts  known  as 
material  accounts,  l^bpr  accounts,  and  factory  expense  accounts.    The  items 


ELEMENTS   OF   COST 


201 


entering  into  each  of  these  accounts  may  be  further  classified  in  separate  accounts 
to  any  extent  desired,  in  a  manner  similar  to  the  classification  of  items  in  the  prin- 
cipal and  subsidiary  accounts  of  a  trading  business.     (Read  ^134  to  139) 

643.  Materials.  In  a  manufacturing  sense,  material  is  that  of  which  any- 
thing is  made.  Raw  material  is  material  in  its  natural  state,  or  nearly  so,  such 
as  coal,  cotton  or  wool.  Many  materials  pass  through  several  stages  of  manu- 
facture before  they  reach  their  final  form  in  the  finished  product;  for  instance, 
iron  ore  is  converted  into  metal  by  one  process,  into  steel  by  another,  and  into 
its  final  form  by  a  third  and,  not  infrequently,  by  a  fourth  or  fifth  operation.  Con- 
sequently, the  finished  product  of  one  concern  or  factory  or  department  may 
become  the  material  of  another;  for  instance,  the  finished  product  of  the  pig  iron 
manufacturer  becomes  the  material  of  the  steel  manufacturer,  and  his  finished 
product,  in  turn,  becomes  the  material  of  the  engine  builder  or  the  tool  maker,  etc. 

644.  Labor.  This  is  a  most  important  element  entering  into  the  cost  of  manu- 
facture. It  represents  the  cost  of  converting  the  material  into  the  finished  prod- 
uct, whether  the  labor  is  expended  direct^  upon  the  material,  in  the  operation 
of  machines,  or  in  other  ways  connected  with  the  processes  of  manufacture. 

645.  Factory  expenses,  or  "shop,"  or  ''manufacturing,"  expenses,  as  they 
are  variously  designated,  include  the  cost  of  superintendence,  incidental  labor, 
supplies,  rent,  fuel  and  light,  power,  taxes  on  plant,  insurance  on  plant,  mainte- 
nance, repairs,  renewals,  depreciation,  and  such  other  items  as  enter  into  the 
cost  of  production.  These  expenses  are,  in  a  general  way,  similar  to  the  general 
expenses  of  a  trading  business,  but  they  include  only  those  that  relate  to  the 
particular  shop  or  factory  covered  in  the  manufacturing  accounts  and  not 
to  the  general  expenses  of  the  business,  unless  they  are  all  included  in  factory 
expense,  which  would  be  permissible  only  in  rare  instances  and  under  very  unusual 
circumstances.     (Read  1[310,  314,  etc.) 

646.  To  the  manufacturer,  a  thorough  understanding  of  the  different  ele- 
ments of  cost  entering  into  the  manufacture  of  the  goods  he  makes  or  produces  is 
of  the  utmost  importance,  and  since  the  accounts  of  a  manufacturing  concern  are, 
in  a  large  part,  a  record  of  these  various  costs,  it  is  also  important  that  the  student 
of  accounts  should  understand  them  and  their  relations  to  the  various  manufac- 
turing processes  before  he  proceeds  to  a  detailed  study  of  these  processes  and  of 
the  various  manufacturing  accounts  and  records.  This  leads  us  to  a  considera- 
tion of  cost  accounting. 


202  BOOKKEEPING   AND   ACCOUNTANCY 

COST  ACCOUNTING. 

647.  Cost  accounting  refers  to  that  department  of  accountancy  which  has 
for  its  purpose  the  ascertaining  and  recording  of  the  actual  cost  of  making  things, 
i.e.,  the  actual  manufacturing  cost  of  a  given  article  or  product.  It  is  sometimes 
called  "Costing,"  and  when  installed  in  connection  with  a  particular  concern  it  is 
generally  referred  to  as  a  "cost  system." 

648.  Cost  accounting  is  perhaps  the  least  understood  of  the  many  subjects 
relating  to  accountancy.  It  is  also  considered  to  be  one  of  the  most  difficult 
subjects  an  accountant  has  to  deal  with,  not  because  its  general  underlying 
principles  and  the  objects  to  be  obtained  are  so  hard  to  understand,  for  they  are 
quite  simple,  but  rather  because  of  the  trouble  experienced  in  applying  these 
principles  to  meet  the  infinite  variety  of  conditions  found  in  connection  with 
different  manufacturing  processes  and  establishments.  A  high  order  of  profes- 
sional experience  and  skill  is  required  to  work  out  the  details  of  a  satisfactory 
cost  system  for  a  concern  of  any  considerable  size,  where  the  manufacturing 
processes  are  at  all  complicated.  Cost  accounting  is,  therefore,  given  a  some- 
what fuller  explanation  in  this  work  than  would  otherwise  be  necessary, 
although  the  discussion  is  directed  to  the  records  and  bookkeeping  features  of 
the  subject  rather  than  to  those  that  relate  to  shop  organization,  shop  man- 
agement, labor  efficiency,  cost  installation,  etc.,  which  are  subjects  outside  the 
main  purpose  of  this  text,  although  they  are  given  some  incidental  attention. 

649.  It  should  be  understood  that  cost  accounting  is  not  a  system  of  book- 
keeping so  much  as  a  system  of  cost  records  and  of  methods  to  ascertain  the  actual 
cost  of  the  material,  labor,  and  expenses  entering  into  the  finished  manufactured 
product.  Cost  books  and  records  are  separate  and  distinct  from  the  regular, 
or  commercial,  account  books  of  the  concern,  although  the  closer  they  are  inter- 
woven and  articulated  with  the  various  manufacturing  accounts  of  the  principal 
books  the  better  the  results  flowing  from  the  cost  system  installed  are  likely  to  be. 
It  is,  in  fact,  a  study  of  "  cost  of  production"  as  well  as  of  cost  accounts. 

650.  Cost-keeping,  or  cost  finding,  is  frequently  considered  a  specialty  in 
factory  management.  While  a  cost-keeper  should  know  accountancy,  he  may 
not  rank  high  outside  of  his  specialty.  The  ability  to  ascertain,  analyze,  and 
compare  the  facts  and  conditions  of  a  particular  factory  or  concern  is  the  first 
requisite.  The  second  is  the  ability  to  work  out  a  practical  cost  system  that  will 
suit  the  facts  and  conditions  as  they  exist,  and  give  the  "units  of  information" 
required  for  efficient  management. 


COST  ACCOUNTING 


203 


651.  Modern  commercial  and  industrial  methods  have  made  cost  account- 
ing a  necessity.  The  margin  of  profit  between  cost  and  selling  price  of  standard 
commodities  has  been  narrowing  steadily  as  our  natural  resources  have  been  devel- 
oped and  our  trade  and  manufacturing  conditions  have  become  more  clearly 
defined  and  settled.  The  consumer — the  man  who  buys— is  in  the  market  to 
purchase  as  cheaply  as  possible;  in  fact,  all  other  things  being  equal,  he  will  invari- 
ably buy  where  he  can  get  "the  same  goods  for  less  money"  or  "more  goods  for 
the  same  money."  The  merchant,  or  trader — the  man  who  sells  to  the  consumer 
and  buys  from  the  manufacturer  or  producer— transmits  this  pressure  of  competi- 
tion for  the  lowest  possible  price  back  from  the  man  who  buys  to  the  man  who 
makes  the  goods. 

652.  The  manufacturer— the  man  who  makes  things— must  find  his  profit 
between  the  price  for  which  he  can  sell  his  products  and  their  "cost  to  make." 
He  cannot  fix  his  prices  higher  than  the  prices  of  other  manufacturers  for  the  same 
article.  He  must  meet  competition.  If  he  would  make  a  profit  he  must  manu- 
facture as  cheaply  as  his  competitors,  and  if  he  can  reduce  his  "cost  to  make" 
below  the  cost  to  make  of  his  competitors,  he  can  increase  his  profit  to  that  extent, 
and  still  meet  competition. 

653.  Here  we  are  brought  face  to  face  with  the  necessity  of  cost  accounting, 

i.e.,  a  system  of  records  and  accounts  that  will  show  the  actual  cost  of  producing 
any  given  article  or  number  of  articles  through  every  process  of  manufacture, 
covering  the  entire  period  from  the  time  materials  are  put  in  process  and  the 
labor  is  employed  which  will  transform  them  into  manufactured  products,  until 
the  time  the  finished  article  is  ready  for  sale  and  dehvery,  and,  indeed,  until  the 
time  when  it  is  sold  and  delivered  to  the  buyer. 

654.  What  constitutes  cost.  The  cost  of  an  article,  as  already  indicated, 
may  be  divided  into  three  parts,  namely:  cost  of  material  and  labor,  which  are 
known  as  "direct  charges,"  and  cost  of  factory  expenses,  which  are  known  as 
"indirect  charges." 

(1)  Cost  of  material  includes  cost  of: 

(a)  The  raw  article. 

(b)  Completed  parts  purchased. 

(c)  Partially  completed  parts  purchased. 

(2)  Cost  of  labor  includes  the  cost  of  productive  labor  directly  employed  in  the  manu- 
facturing processes,  but  does  not  include  incidental  labor  about  the  factory  or  shop  not 
emploj-ed  directly  in  the  manufacturing  processes. 

(3)  Cost  of  factory  expenses  ("burden")  includes: 

(1)     Rent  and  taxes  of  factory. 

C2)     Depreciation  and  maintenance  of  plant,  machinery  and  tools. 


204  BOOKKEEPING   AND   ACCOUNTANCY 

(3)  Motive  power,  lighting  and  heating. 

(4)  Superintendence. 

(5)  Unproductive  labor,  including  wages  of  timeke^sperS,  storekeepers,  and  those 

employed  for  other  purposes,  such,  as  cleaning  factory,  distributing  and  col- 
lecting tools,  etc. 

(6)  Interest  on  capital  invested  in  materials,  supplies,  plant,  machinery  and  tools. 

654a.  In  addition  to  the  cost  of  material,  the  cost  of  labor,  and  the  cost  of  factory  expenses, 
stated  above,  it  is  sometimes  considered  that  some  part  of  the  administrative  or  "overhead" 
expenses  should  be  inchided  in  the  "cost  to  make." 

(1)  Administrative  expenses  include: 

(1)  Salaries  of  managers,  clerks  and  directors. 

(2)  Rent,  taxes,  etc.,  of  show-rooms,  and  office  and  general  office  expenses. 

(3)  Discounts,  allowances,  and  bad  debts. 

(4)  Interest  on  capital  other  than  that  included  under  "factory  expenses." 

(2)  Factory  expenses,  or  "burden,"  are  always  included  in  the  "cost  to  make,"  i.e.,  the  pro- 
duction cost  of  the  article.  Administrative  expenses,  on  the  other  hand,  are  never  included  in 
the  cost  of  production  unless  they  contain  items  which  are  clearly  manufacturing  expenses. 
However,  both  administrative  and  selling  expenses,  with  the  profit,  must  be  included  in  finding 
the  se/Zz'n^  pn'ce  of  the  article. 

655.  A  thorough  understanding  of  the  different  elements  of  cost  entering 
into  the  total  cost  of  manufacturing  and  marketing  a  given  article  or  line  of 
goods  is  fundamental  in  the  study  and  practice  of  cost  accounting.  The  elements 
of  cost  are  cumulative  in  their  finding,  beginning  with  the  first,  or  prime  cost, 
to  which  other  elements  are  added  until,  fiDally,  the  selling  price  of  the  finished 
product  is  determined.  The  primary  elements  of  cost  are  invariably  material 
and  labor,  although  the  proportions  of  each  entering  into  different  products 
may  vary  greatly. 

656.  Finding  costs.  The  costs  represented  in  material  and  labor  are  not 
hard  to  determine  because  they  are  represented  by  the  actual  cost  of  the  materials 
used  and  the  cost  of  direct  labor  as  shown  on  the  time  cards  and  pay-roll.  The 
costs  of  factory  expenses,  or  "burden,"  and  such  administration  expenses  or 
other  "overhead"  charges  as  may  be  considered  manufacturing  expenses,  are 
somewhat  more  difficult  to  determine  and,  particularly,  to  properly  distribute 
over  the  various  articles  manufactured. 

657.  Factory  expenses  consist  of  all  incidental  expenses  for  indirect  labor, 
supplies  and  material,  and  other  items  of  expense  necessary  in  operating  the 
factory  which  are  chargeable  directly  to  the  cost  of  manufacture.  (11645)  These 
expenses  are  known  as  "burden,"  doubtless  for  the  reason  that  they  must  be 
borne  and  provided  for  as  a  part  of  the  factory  cost  of  the  articles  produced. 


COST  ACCOUNTING  205 

658.  Overhead  expenses  are  those  which  are  incurred  in  the  administrative 
department  of  the  concern  but  which  have,  in  fact,  increased  the  cost  of  produc- 
tion in  the  factory,  works  or  plant,  either  in  their  management  or  in  technical 
or  clerical  service  rendered,  although  instead  of  being  charged  directly  to  factory 
expense,  which  is  always  preferable,  are  charged  in  the  general  or  administrative 
expense  accounts  of  the  concern.  These  are  known  as  ''overhead"  expenses, 
doubtless  because  they  represent  a  manufacturing  cost  over  and  above  those 
included  under  the  head  of  factory  expense,  or  burden. 

659.  It  is  sometimes  diflficult  to  distinguish  between  what  should  properly 
be  classed  as  administrative  expenses  and  those  which  should  properly  be  con- 
sidered as  manufacturing  expenses.  An  illustration  is  where  part  of  the  services 
of  officers  or  office  employes  are  given  to  the  manufacturing  department  and  part 
to  the  selling  or  financial  departments.  Another  illustration  relates  to  the  proper 
account  to  be  charged  for  drawings  and  patterns. 

660.  Just  what  overhead  expenses  should  be  included  in  "factory  cost,"  or 
"works  cost,"  or  "cost  of  production,"  as  it  is  variously  designated,  is  aquestion 
about  which  there  are  differences  of  opinion.  Some  hold  that  all  expenses  out- 
side of  those  incurred  in  effecting  sales  and  in  the  management  of  the  financial 
affairs  of  the  concern  are  necessarily  incurred  in  connection  with  the  manufactur- 
ing processes  and  that  they  should,  therefore,  be  included  in  the  manufacturing 
costs  in  ascertaining  the  "factory,"  or  "works"  cost,  or  the  "cost  of  production." 
This  view  is  opposed  by  the  argument  that  it  might  very  easily  be  carried  to  the 
extreme  of  including  a  large  part  of  the  administrative  or  other  general  expenses 
in  factory  expense,  which  would,  in  fact,  capitalize  them  by  including  them  in 
the  cost  of  the  goods  manufactured,  as  shown  in  the  finished  goods  account,  and 
would  thus  show  them  as  assets  in  the  final  statements  of  the  business  instead 
of  expenses  chargeable  against  income. 

661.  .  Others  hold  that  manufacturing  costs  should  include  only  those  that 
are  incurred  in  the  factory  or  works  proper,  and  that  those  incurred  in  connection 
with  the  administration  or  financial  departments  of  the  business,  even  when 
including  the  cost  of  technical  or  clerical  service  rendered  to  the  factory,  should  in 
no  way  be  considered  as  factory  expenses  and,  therefore,  should  not  be  included 
among  the  elements  of  cost  of  production  chargeable  to  orders,  jobs  or  contracts. 
The  point  at  which  the  line  is  drawn  between  factory  and  other  expenses  by  those 
who  hold  this  view  is  illustrated  in  a  concern  having  its  plant  in  the  country  and  its 
commercial  office  in  the  city,  where  only  the  expenses  of  the  former  would  be 
included  in  factory  cost,  the  expenses  of  the  latter  being  classed  as  expenses  of 
conducting  the  business  that,  in  a  bookkeeping  sense,  should  be  charged  against 
income. 


206  BOOKKEEPING   AND   ACCOUNTANCY 

662.  There  is  general  agreement,  however,  that  the  best  practice  is  to 
charge  all  expenses  that  are  classed  as  factory  expenses  directly  to  that  account 
at  the  time  the  entry  is  made,  which  will  avoid  any  later  question  as  to  their 
proper  disposition  and  will  eliminate  all  questionable  items  from  the  adminis- 
trative or  general  expense  accounts,  so  that  these  accounts  will  then  clearly  repre- 
sent balances  which  should  be  charged  against  income  and  should  appear  only  in 
the  trading  and  profit  and  loss  statement. 

663.  A  careful  consideration  of  these  views  would  seem  to  indicate  that  the 
line  between  factory  costs  and  administrative  and  other  costs  should  be  drawn  at 
that  point  which  would  include  as  manufacturing  expenses  only  those  items  that 
are  clearly  a  direct  element  of  cost  in  the  production  of  the  manufactured  article, 
no  matter  in  what  account  they  may  be  found.  In  any  event,  what  should  be 
considered  manufacturing  costs  and  what  should  constitute  administrative  and 
other  expenses,  and  the  place  at  which  the  former  should  end  and  the  latter  begin, 
must  be  decided  separately  for  each  establishment  in  which  a  cost  system  is 
installed,  either  by  the  owners  or  by  the  accountant.     (1[752) 

664.  The  cost  formula  given  below  clearly  shows  the  various  elements  of 
cost  entering  into  the  finished  product,  from  the  prime  cost  to  selling  price.  It 
agrees  substantially  with  the  cost  formulas  prepared  by  a  number  of  the  leading 
cost  specialists,  which  are  generally  accepted  as  being  as  nearly  accurate  as  they 
can  be  made.  The  elements  of  cost  may  be  thoroughly  understood  from  a  study 
of  this  formula  and  the  graphic  illustrations  showing  cost  elements  which  follow, 
particularly  if  the  accompanying  explanations  are  carefully  considered. 

COST  FORMULA. 

(1)  Cost  of  Material  +  Direct  Labor  =  First  or  Prime  Cost. 

(2)  Prime  Cost  +  Factory  Expense,  or  "burden,"  =  Factory  Cost,  or  Cost 
of  Production. 

(3)  Factory  Cost  +  General  and  Administration  Expenses,  or  ''Overhead," 
=  Total  Cost. 

(4)  Total  Cost  +  Selling  Expense  and  Profit  =  Selling  Price. 

665.  Wliile  "prime  cost,"  "factory  cost,"  and  "total  cost"  are  terms  com- 
monly used  and  accepted,  there  are  other  terms  used  to  express  the  same  costs 
which  are  preferred  by  some  writers.  There  is  general  agreement  as  to  what  should 
be  included  as  first  or  prime  cost,  but  there  is  some  difference  of  opinion  as  to  what 
should  be  included  under  "factory  cost"  and  "total  cost,"  and  as  to  what  propor- 
tion, if  any,  of  administrative  and  general  expenses  should  be  included  as  factory 
costs,  as  has  already  been  explained  in  ^660,  661. 


COST  ACCOUNTING 


207 


666.  Explanation  Showing  the  Relation  between  the  Elements  ob^ 
Cost  in  the  Formula  and  the  Manufacturing  Accounts  in  the  General 
Ledger. 

a.  The  first,  or  prime  cost  is  made  up  of  the  cost  of  material  and  direct  labor,  and  corre- 
sponds exactly  with  the  items  charged  to  materials  in  process  and  productive  labor  accounts. 
(11711a,  716a)  These  items  are  shown  on  the  shop  cards  or  in  the  job  ledger  at  the  time  when  thf 
order,  job  or  contract  is  completed.     (1[750,  741a) 

b.  Factory  cost  represents  the  prime  cost,  plus  manufacturing  expense,  or  "burden.'' 
(11719)  Theitemsof  factory  expense  are  indicated  in  1[645,  734a,  b.  The  items  referred  to  art 
those  of  the  factory  or  works  only  and  not  those  of  the  office  or  general  establishment.  Thesf 
factory  costs,  when  distributed,  a^gree  exactly  with  the  items  credited  to  the  contra  manufp.4' 
turing  expense  account.     (1[722c) 

c.  Total  cost  equals  factory  cost,  plus  such  general,  administrative  or  other  "overhead'' 
expenses,  etc.,  as  may  be  charged  to  the  various  orders,  jobs  or  contracts.  The  items  included 
in  the  "total  cost,"  or  "total  cost  to  make,"  correspond  exactly  with  those  charged  to  finished 
goods  account.     (11741a) 

d.  The  selling  price  equals  the  total  cost,  plus  such  percentages  or  other  proportions  of 
that  cost  as  are  added  for  selling  expenses  and  for  the  profit  to  be  made  on  the  goods  sold. 
Selling  expenses  are  not  and  should  never  be  considered  as  manufacturing  expenses,  and  should 
never  be  included  in  the  production  cost  of  goods  manufactured.  "Selling  price"  exactly 
corresponds  to  the  amount  credited  to  sales  count.     (1[745) 

e.  The  selling  expense  account  of  a  manufacturing  business  corresponds  exactly  with  the 
same  account  for  a  trading  business.  (1[264  to  277)  It  is  a  profit  and  loss  account  and,  like 
other  similar  accounts,  must  be  deducted  from  the  gross  income  shown  by  the  trading  statement 
before  the  net  profit  can  be  ascertained. 

667.  The  cost  formula  following  ^664  may  be  further  illustrated  by  the 
following  diagram,  in  which  it  will  be  noted  that  100%  represents  the  "total 
cost,"  the  percentages  below  representing  the  proportions  of  the  different  elements 
Entering  into  the  total  cost  and  those  above  representing  the  additions  to  find  the 
sellirg  price  after  providing  for  selling  expenses  and  profit. 


^.f# 


^ 


8-0% 


Mt&in^i^^ 


Siod^ 


'^^^ 


^ 


208 


BOOKKEEPING   AND   ACCOUNTANCY 


ANOTHER    COST    FORMULA. 

668.  The  following  formula  is  described  as  "  Analysis  of  Sale  Price  of  a  Man- 
ufactured Article."*  In  this  formula  it  will  be  seen  that  there  is  some  difference 
in  the  terms  used  to  express  the  various  costs  as  they  are  cumulated,  "shop  charge" 
being  substituted  for  factory  expense,  or  burden,  and  "general  establishment 
charge"  being  substituted  for  administrative  and  general  expenses,  or  over- 
head. In  like  manner,  "works  cost"  and  "inclusive  costs"  are  substituted  for 
factory  costs  and  total  costs. 


selling  Price  $505 


Inclusive  or  ITo.  3  Cost  $420- 


-Worto  or  Ko.  2  Coat 


->> 


,<Prime  or  Ko.  1  Cost  $^65- 


-^1 


Material 
$125 


Wages 


Shop  Charge 
$135 


General 

Establishment 

Charge 

#20 


Profit 


This  analysis  divides  the  cost  of  production  into  three  divisions: 

First — The  bare  cost  of  material  and  wages,  which  is  termed  prime  cost,  or  "No.  1  cost." 

Second — Prime  cost,  plus  the  expenses  of  production  incurredin  passing  through  the  shops, 
which  is  termed  works  cost,  or  "No.  2  cost." 

Third — Works  cost,  plus  the  expenses  of  the  commercial  management  and  selling  organi- 
zation, which  is  termed  inclusive  cost,  or  "No.  3  cost." 

The  sales  price,  less  inclusive  cost,  equals  the  profit  on  the  order.  This  division  of  costs 
agrees  with  the  theory  expressed  in  1[661,  which  would,  of  course,  eliminate  any  part  of  the 
general  expenses  from  cost  of  production. 

Note:    Other  good  books  for  the  student  of  accountancy  are: 

"Industrial  Plants,  Their  Arrangement  and  Construction,"  by  Charles  Day. 
'The  Complete  Cost-keeper,"  by  H.  S.  Arnold. 
'The  Factory  Manager,"  by  H.  S.  Arnold. 

"The  Depreciation  of  Factories,"  by  Ewing  Matheson, 

"Bookkeeping  for  Accountant  Students,"  by  L.  E-  Dicksee. 

"Modern  Accounting,"  by  A.  A,.  Hatfield. 


"Expense  Burden,"  bj'  A.  Hamilton  Church. 


ADVANTAGES   OP  A    COST   SYSTEM  209 

SOME  OF  THE  ADVANTAGES  OF  A  COST  SYSTEM. 

669.  When  the  actual  cost  of  producing  a  given  article  or  a  number  of  arti- 
cles or  a  certain  line  of  goods  is  known,  the  manufacturer  is  in  a  much  better  posi- 
tion to  manage  his  business  intelligently,  either  in  purchasing  materials,  in 
employing  labor  or  in  the  production  of  manufactured  goods,  than  he  would  be  with- 
out that  information.  While  finding  the  actual  cost  of  manufacture  is  the  most 
important  object  of  any  cost  system,  there  are  many  other  advantages  that  are 
of  equal,  and  frequently  of  greater  importance  in  the  ultimate  results  produced. 

Some  of  the  advantages  of  a  cost  system  are  as  follows: 

1.  To  know  the  exact  cost  of  the  materials  entering  into  each  manufactured  article,  order 
or  job,  and  to  have  all  material  purchased  and  used  correctly  accounted  for,  so  that  the  balance 
shown  by  the  materials  account  may  agree  with  the  inventory  value  of  the  materials  in  the  store- 
room. 

2.  To  know  the  amount  and  the  wage  value  of  time  spent  on  each  article,  operation  or 
order,  and  to  know  the  degree  of  efficiency  of  each  workman  so  that  those  who  are  high  in  effi- 
ciency may  be  rewarded  and  those  who  are  low  may  be  dispensed  with;  and,  particularly,  to 
assign  tasks  to  each  workman  in  proportion  to  his  skill  and  ability  to  perform  them  well  and 
efficiently. 

3.  To  know  the  relative  cost  of  production  by  the  use  of  improved  machines  over  old  and 
less  efficient  types,  and  to  know  the  cost  per  hour  or  day  of  operating  each  machine  separately 
or  in  groups,  departments  or  producing  centers. 

4.  To  know  the  actual  cost  of  "burden"  expenses  of  the  factory  or  shop,  or  of  "over- 
head" expenses  of  the  office  or  administrative  department,  and  of  de preciation which. shouldhe 
included  in  the  cost  of  manufacture  and  distributed  over  the  product. 

5.  To  know  the  location,  the  condition  and  the  advancement  of  each  unfinished  article, 
order  or  contract,  at  any  given  time  while  in  the  process  of  manufacture. 

6.  To  know  by  running  book  inventories,  supported  by  controlling  accounts,  how  much  of 
each  kind  of  material,  supplies,  and  finished  goods  is  on  hand,  so  that,  with  the  smallest  invest- 
ment of  capital,  orders  may  be  placed  in  right  quantities  and  at  proper  times  to  meet  all  require- 
ments, and  to  prove  these  accounts  at  stated  intervals  by  actual  inventories  of  stock  on  hand. 

7.  To  show  on  manufacturing,  trading  and  profit  and  loss  statements  or  on  statements 
supplementing  them,  all  essential  elements  of  cost  and  production  in  whatever  detail  they  are 
desired. 

8.  To  make  possible  the  preparation  of  statistical  and  other  statements,  so  arranged  that 
the  information  contained  therein  may  be  compared  with  similar  statements  of  other  fiscal 
periods  to  ascertain:  (a)  increase  or  decrease  of  total  output;  (6)  increase  or  decrease  of 
monthly  output;  (c)  increase  or  decrease  of  idle  time;  (d)  increase  or  decreaseof  labor  efficiency 
and  of  machinery  efficiency;   (e)  increase  or  decrease  of  cost  of  production  per  order,  job  or 


210  BOOKKEEPING   AND   ACCOUNTANCY 

contract  or  per  any  other  convenient  unit  of  comparison;  (/)  increase  or  decrease  of  selling 
expenses,  of  administration  expenses,  of  gross  profit  and  of  net  profit ;  (g)  relative  eflBciency  and 
cost  of  different  classes  of  labor. 

9.  To  have  such  results  available  as  will  disclose  defects  in  organization  or  administration, 
BO  that  they  may  be  rectified. 

10.  To  know  the  productive  value  of  every  unit  or  factor  available  for  use  in  the  factory  or 
plant,  so  that  the  exact  cost  of  each  item  entering  into  the  manufacture  of  any  given  article  or 
product,  and  its  factory  cost,  may  be  correctly  and  accurately  ascertained  in  estimating  the 
cost  and  selling  price  of  goods  called  for  in  prospective  orders,  jobs  or  contracts. 

11.  To  know  the  percentages  or  amounts  which  must  be  added  to  factory  cost  to  covei 
overhead  and  other  expenses  necessary  to  produce  and  market  the  goods  at  a  profit,  called  for 
in  estimating  on  prospective  orders,  jobs  or  contracts,  or  otherwise. 

12.  To  have  information  at  hand  that  will  provide  a  basis  for  calculating  the  allowances 
which  should  be  made  for  unexpected  contingencies  and  losses  in  estimating  the  cost  of  goods 
called  for  in  prospective  orders,  jobs  or  contracts. 

669a.  Thus  it  will  be  seen  that  an  efficient  cost  system  enables  the  manu- 
facturer to  decrease  costs  and  increase  production  and  profits  in  many  ways  which 
would  otherwise  be  impossible;  such  as: 

1.  To  reduce  the  cost  of  and  waste  in  material  and  time  used. 

2.  To  increase  labor  production  and  secure  higher  efficiency  in  workmen  by  assigning 
enaximum  tasks  which  they  are  willing  and  competent  to  perform. 

3.  To  reduce  cost  and  increase  production  by  the  use  of  improved  machinery. 

4.  To  reduce  expenses  in  factory  or  office  by  increasing  the  efficiency  of  employees  and 
dispensing  with  unnecessary  labor  and  inefficient  service. 

5.  To  know  the  maximum  capacity  of  the  factory  or  plant  in  a  given  process,  group,  depart- 
ment or  producing  center  for  a  given  time,  that  work  may  be  so  distributed  as  to  maintain 
the  factory  or  plant,  as  a  whole,  at  the  highest  point  of  productive  efficiency. 

6.  To  establish  wage  systems  that  will  secure  to  the  diligent  the  proper  rewards  for  indus- 
try and  that  will  encourage  and  stimulate  workmen  to  perfect  themselves  in  ability  and  produc- 
ing capacity. 

7.  To  know  the  goods  which  may  be  manufactured  and  sold  at  the  largest  profit,  and  to 
know  those  goods  which  cannot  be  manufactured  and  sold  at  a  fair  profit,  so  that  the  sales  of 
the  former  may  be  increased  and  those  of  the  latter  diminished  or  discontinued. 

8.  To  estimate  accurately  and  expeditiously  on  specifications  of  prospective  orders  or 
contracts. 


ADVANTAGES   OF   A    COST   SYSTEM  211 

670.  Many  advantages  other  than  those  enumerated  follow  the  introduc- 
tion of  well-administered  cost  systems,  although  they  vary  somewhat  in  impor- 
tance, depending  upon  the  condition  and  circumstances  of  the  business.  The 
extent  to  which  increased  efficiency  in  labor,  machinery,  operation  and  output 
IS  secured  by  the  introduction  of  a  cost  system  determines,  in  a  large  measure,  the 
extent  of  its  usefulness  and  value  in  a  manufacturing  concern. 

671.  It  is  not  the  purpose  of  cost  accounting  to  show  what  a  given  oider, 
job  or  contract  should  cost  or  to  show  its  estimated  cost  or  to  show  any  cost 
other  than  the  actual  cost  after  it  is  completed;  i.e.,  the  purpose  is  to  show  the 
exact  cost  of  each  article  made,  and,  through  the  various  subsidiary  and  controlling 
accounts,  what  the  actual  results  of  the  manufacturing  processes  have  been. 
A  comparison  between  the  estimated  cost  when  the  order,  job  or  contract  was 
accepted,  and  the  actual  cost  when  it  is  completed,  will  show  any  inaccuracies  in 
the  estimate,  and  will  give  substantial  information  for  making  future  estimates. 

672.  The  efficiency  of  a  cost  system  depends  almost  wholly  upon  the  organi- 
zation back  of  it  and  how  the  system  is  planned,  installed  and  carried  out.  The 
best  cost  systems  are  usually  those  which  have  small  beginnings  and  are  gradually 
developed  and  perfected  until  they  fully  meet  the  particular  requirements  for 
which  they  are  intended.  In  planning  a  cost  system,  care  should  be  taken  to 
provide  for  the  practical  requirements  rather  than  the  theoretical  requirements  of 
the  case,  and  to  avoid  the  creation  of  a  system  that  will  be  expensive  to  install  or 
operate.  It  is  impossible  to  formulate  or  construct  a  single  system  of  cost 
accounting  that  will  meet  the  requirements  of  every  line  of  business;  indeed,  a 
special  system  must  be  planned  for  each  particular  concern,  as  no  two  establish- 
ments are  likely  to  present  for  consideration  the  same  conditions  and  facts. 

673.  Before  attempting  to  formulate  a  cost  system  for  any  particular  con 
cern,  it  is  first  necessary  to  make  a  careful  study  and  survey  of  the  plant  or 
factory  and  its  organization,  and  of  all  the  circumstances  surrounding  it.  How- 
ever, as  the  purpose  of  this  book  is  to  give  consideration  to  the  accounting  features 
of  cost  systems  rather  than  to  the  devising  of  cost  systems  or  the  study  of  shop 
organization,  management,  labor  efficiency,  etc.,  these  topics  receive  only  inci- 
dental attention. 


212  BOOKKEEPING   AND   ACCOUNTANCY 

WAGE  SYSTEMS. 

674.  Time  is  one  of  the  principal  and  most  expensive  elements  of  cost  in 
manufacturing.  As  labor  is  one  of  the  elements  of  prime  cost,  some  discussion 
of  wages  is  necessary.  There  are  various  wage  systems  in  common  use,  such  as 
the  day  rate,  piece-work  rate,  differential  rate,  premium,  bonus,  profit-sharing, 
stock  distribution  or  some  combination  of  these  systems.  The  best  system  to 
use  is  determined  by  the  conditions  surrounding  the  particular  establishment  in 
which  it  is  to  be  employed.  An  understanding  of  these  systems  is  important  to 
the  student  of  accounts,  principally  because,  in  many  instances,  they  form  the 
basis  of  computation  for  the  distribution  of  factory  expenses,  or  burden. 

The  day  rate.  This  is  perhaps  the  commonest  method  of  paying  wages.  Under  this  method 
each  workman  is  paid  a  certain  price  for  each  day's  or  hour's  labor,  depending  upon  his  skill 
and  experience. 

Piece  work.  Under  this  method,  each  workman  is  paid  a  certain  price  for  the  production 
of  a  certain  article  or  part.  He  is  paid  for  what  he  does  and  no  more.  It  has  many  advan- 
tages, but  in  its  practical  operation  it  has  certain  deficiencies  that,  not  infrequently,  make  it 
objectionable. 

Differential  rate.  This  is  the  piece-work  method,  modified  by  an  application  of  the  time 
rate  to  the  work.  By  this  plan  the  workman  is  paid  "a  higher  price  for  qifick  time  and  per- 
fect work,  and  a  lower  price  for  slow  time  and  imperfect  work."  This  system  is  more  nearly 
ideal  in  its  operation  than  either  the  aay-rate  or  the  piece-work  plan. 

The  premium  plan.  This  method  differs  from  piece  work  by  paying  a  premium  for  the  com- 
pletion of  a  certain  task  in  less  time  than  the  average  time  allotted  for  its  performance. 

The  bonus  plan.  This  is,  practically,  a  combination  of  the  differential  and  premium  plans, 
in  that  it  offers  "an  increase  in  the  hourly  wages  for  the  time  actually  spent,  the  rate,  itself, 
depending  upon  the  per  cent  of  time  gained." 

Profit-sharing  and  stock  distribution.  These  are  held  out  as  ideal  methods  of  increasing 
production  and  establishing  the  best  relations  between  employer  and  employee  by  having  each 
workman  share  in  the  profits  in  addition  to  his  regular  wages.  There  are  various  methods 
suggested  for  accomplishing  this  result,  but  as  this  plan  has  not  beenjadopted  in  many  instances, 
its  actual  value  as  a  wa,ge  system  has  not  been  fully  determined. 

Full  descriptions  of  these  and  other  wage  systems  are  found  in  the  following  books,  which 
may  be  referred  to  with  profit: 

"Work,  Wages  and  Profits,"  by  H.  L.  Gantt. 

"Factory  Organization  and  Costs,"  by  J.  L.  Nicholson. 

"Profit-Making  Management,"  by  Charles  U.  Carpenter. 

"Efficiency  as  a  Basis  for  Operation  and  Wages,"  by  Harrington  Emerson. 


DISTRIBUTION    OF   INDIRECT   EXPENSES  '^13 

DISTRIBUTION  OF  INDIRECT  EXPENSES. 

675.  The  factory  cost  of  an  article,  as  previously  stated,  is  made  up  of  three 
elements  of  cost — material,  labor  and  factory  expenses,  material  and  labor  being 
known  as  direct  costs,  while  factory  expenses  are  known  as  indirect  costs  or  charges. 

676  The  accurate  distribution  of  factory  expenses  ("burden"  and  "over- 
head") among  the  different  orders,  jobs  or  contracts, •  so  that  each  article  manu- 
factured may  be  charged  with  its  actual  cost,  presents  perhaps  the  most  difficult 
problem  as  well  as  one  of  the  most  important  with  which  the  cost  accountant  hets 
to  deal,  and  its  difficulty  is  increased  in  proportion  to  the  number  of  the  kinds 
and  varieties  of  goods  manufactured.     (^756) 

677.  The  fixing  of  a  correct  basis  of  distribution  or  as  nearly  an  exactly 
correct  basis  as  may  be  possible,  which  wnll  connect  and  identify  every  item  of 
cost  with  the  particular  order,  job  or  contract  to  which  it  belongs,  so  that  the 
actual  cost  of  producing  each  article  may  be  definitely  known,  is  fundamental  in 
cost  accounting.  This  must  be  found  in  some  unit  of  measurement  that  will  most 
nearly  assign  to  each  article  the  exact  manufacturing  expense  which  properly 
belongs  to  it.  If  this  unit  of  measurement  is  uncertain  or  variable  in  its  appli- 
cation, the  cost  system  must  fail  to  accomplish  its  most  important  purpose  from 
the  fact  that  it  will  not  certainly  tell  the  truth,  no  matter  how  efficient  it  may  be 
in  other  directions. 

678.  Three  distinct  imits  of  measurement  have  been  used,  either  singly  or 
in  some  combination  of  them,  as  the  basis  of  distributing  factory  costs  They  are 
"wages  value,"  "wages  time,"  and  "machine  time."  Wages  value  is  the  total 
cost  of  direct  labor  for  a  given  period.  Wages  time  is  the  total  number  of  hours 
direct  labor  is  employed  for  a  given  period.  Machine  time  is  the  number  of 
hours  a  given  machine  or  process  is  in  operation  within  a  specified  period. 

679.  Methods  of  distributing  burden  and  overhead.  A  number  of  different 
methods  are  used,  based  upon  one  or  more  of  these  units  of  measurement, 
each  one  doubtless  having  some  advantages  over  the  other  under  certain  condi- 
tions. Some  are  very  simple  in  their  practical  operation,  while  others  are  more 
complex  and  intricate.  Unfortunately,  the  simpler  methods  are  seldom  accurate 
under  usual  manufacturing  conditions,  while,  on  the  other  hand,  manufacturers 
are  slow  to  adopt  the  more  exact  and  scientific  methods  because  of  the  greater 
expense  required  in  their  practical  operation  and  maintenance.  Several  of  these 
methods  will  now  be  briefly  discussed.  Extended  discussions  may  be  found  in 
the  following  publications,  from  which  some  of  the  statements  in  this  chapter 
are  taken : 

"Proper  Distribution  of  Expense  Burden,"  by  A.  Hamilton  Church. 
"Production  Factors,"   by  A.  Hamilton  Church. 


214  BOOKKEEPING   AND   ACCOUNTANCY 

680.  Direct  labor  cost  method.  This  method  of  distributing  burden  and 
overhead  (manufacturing)  expenses  is  based  on  the  theory  that  the  product 
increases  in  value  in  proportion  to  the  cost  of  labor  entering  into  it,  and  that 
the  greater  the  amount  of  labor  involved  in  the  process  of  manufacture  the  greater 
the  expense  required  to  supervise  the  labor  and  to  conduct  the  factory,  works 
or  shop,  and  that,  consequently,  the  burden  should  be  distributed  in  the  pro- 
portion the  labor  employed  on  a  given  order,  job  or  contract  bears  to  the  total 
wages  paid  for  the  period  of  time.  This  method,  by  reason  of  its  simplicity,  is 
the  one  most  commonly  used,  although  it  is  very  inaccurate  under  most  condi- 
tions and  is,  therefore,  likely  to  gradually  disappear  as  better  methods  are  adopted. 
The  rate  to  be  used  in  distributing  the  burden  by  this  method  is  found  by  divid- 
ing the  total  amount  of  estimated  manufacturing  expenses  for  the  period  by  the 
total  cost  of  the  direct  labor  for  the  same  period  of  time.     (1[720) 

Illustration:  Supposing  the  total  estimated  factory  expense,  or  burden,  is  $780,  and 
the  total  wages,  $1200,  the  rate  per  cent  for  distributing  the  burden  is  $780  -e-  $1200  =  65%, 
i.e.,  65%  of  the  value  of  the  labor  charged  to  an  order  should  be  added  to  cover  the  cost  of 
burden.  Thus,  an  order  showing  cost  of  material,  $50,  cost  of  direct  labor,  $60,  would  have 
added  to  it  65%  of  $60,  or  $39  (1f722c),  giving  a  total  of  $149  as  the  total  factory  cost.  When 
an  equal  percentage  has  been  added  to  all  the  orders  on  which  the  $1200  for  labor  has  been 
charged  for  the  month,  it  will  absorb  and  take  up  the  total  charge  against  factory  expenses  of 
$780. 

681.  Direct  labor  hours  method.  This  method  is  similar  to  the  direct 
labor  cost  method  except  that  the  number  of  productive  hours  is  used  as  the  basis 
of  calculation  instead  of  the  total  amount  of  direct  wages,  i.  e.,  the  amount  of 
indirect  expenses  is  divided  by  hours  instead  of  dollars.  The  rate  per  hour  to  be 
used  is  found  by  dividing  the  total  estimated  manufacturing  expenses  by  the  num- 
ber of  productive  labor  hours  for  the  same  period  of  time.  Both  the  labor  cost 
and  labor  hour  method  give  an  average  result  instead  of  a  direct  assignment  of 
the  exact  cost  to  the  article  produced,  and  for  this  reason  they  are  both  objec- 
tionable. 

Illustration:  Supposing  the  $1200,  or  the  cost  of  labor,  in  the  preceding  illustration, 
represented  3200  labor  hours,  then  the  rate  is  found  by  dividing  $800  by  3200,  which  equals 
twenty-five  cents  per  labor  hour  to  be  added  for  burden.  If  155  labor  hours  were  expended 
on  the  preceding  job,  the  amount  to  be  added  for  burden  would  be  .25  X  155  =  $38.75, 
making  the  total  cost  of  the  order  $148.75. 

682.  Direct  labor  and  material  method.  This  method  is  considered  to  be 
more  accurate  than  either  of  the  methods  previously  described,  when  the  material 
cost  is  greater  than  the  labor  cost.  The  rate  to  be  used  is  found  by  dividing  the 
total  estimated  factory  expenses  by  the  total  cost  of  the  material  and  labor  con- 
sumed for  the  same  period. 


DISTRIBUTION    OF    INDIRECT    EXPENSES  215 

Illustration:  If  the  material  used  for  the  month  cost  $1100,  the  direct  labor  cost  $750, 
and  the  total  factory  expt,ases  for  the  month  were  $975,  that  amount  divided  by  $1850  would 
equal  50%,  or  the  rate.  If  the  labor  and  material  on  a  given  order  amounted  to  $116,  50% 
of  that  amount,  or  $58,  should  be  added  to  cover  expense  burdeu. 

683.  Machine  rate  method.  This  method  is  advocated  by  quite  a  number  of 
cost  specialists.  It  is  intended  to  diminish,  as  much  as  possible,  indirect  fac- 
tory expenses  that,  under  the  preceding  methods,  must  be  prorated  on  a  more 
or  less  arbitrary  basis,  and  to  charge  them  directly  to  the  articles  produced;  but 
the  method  is  limited,  in  the  opinion  of  some  writers,  to  those  factories  or  shops 
where  the  majority  of  operations  are  machine  processes.  The  plan  of  procedure 
under  this  method  jirovides  for  charging  the  labor  and  all  burden  or  overhead 
expenses  directly  to  a  process  or  machine,  in  such  a  way  as  to  show  the  total  cost 
per  hour  or  unit  ( f  measure  of  operating  the  machine  or  process.  This  method 
is  substantially  as  follows: 

1.  All  expenses  which  can  possibly  be  charged  to  machines  or  processes  are  so  charged. 
This  includes  indirect  labor,  supplies,  interest,  floor  space,  depreciation,  etc.,  and  sometimes 
superintendence  and  other  general  factory  expenses  are  included.  It  is  this  step  that  consti- 
tutes the  essential  essence  of  this  method. 

2.  The  indirect  expenses  (other  than  the  above)  are  then  prorated  and  distributed  over 
the  machines  or  processes. 

3.  Combining  the  charges  of  one  and  two,  the  total  machine  rate  is  determined,  which 
includes  all  items  of  cost  but  material  and  direct  labor. 

The  rale  to  be  used  in  distributing  the  indirect  expenses  is  found  by  dividing  their  amount 
by  the  total  number  of  operating  hours  or  other  unit  of  measure  for  the  same  period  of  time. 

(a)  To  find  the  cost  of  any  article  is  then  a  simple  process.  The  nomber  of  hours  a  given 
order,  job  or  contract  is  operated  on  at  each  machinte  or  process,  multiplied  by  the  machine  rate 
for  that  process;  gives  the  different  process  costs.  The  sum  of  these,  or  the  total  process  cost, 
plus  the  material  and  direct  labor  cost,  gives  the  total  factory  cost. 

Illustration:  If  the  work  on  a  given  ord^  was  operated  on  at  machine  No.  1,  for  twelve 
hours,  and  the  rate  was  thirty  cents  an  hour,  the  process  cost  at  that  machine  is  $3.60.  If  five 
hours  were  required  at  machine  No.  2,  on  which  the  rate  was  forty  cents  an  hour,  the  process 
cost  at  that  machine  is  $2.00.  If  the  work  required  twenty-four  hours  at  machine  No.  3,  at 
the  rate  of  e'ight  cents,  the  charge  would  be  $1 .92.     Total  process  or  factory  cost,  $7.52. 

(6)  The  machine  rate  method  would  give  well-nigh  accurate  results  if  all  the  machines 
and  other  processes  were  in  continuous  operation,  but  it  fails  to  take  account  of  the  idle  time 
\s  hen  part  of  the  machines  or  processes  are  not  in  operation.  This  is  the  fatal  weakness  of  the 
method,  as  it  leaves  the  proper  disposition  of  those  expenses  which  are  continuous  in  connection 
with  each  producing  factor  unprovided  for,  with  the  consequent  certainty  that  accuracy  in  the 
distribution  of  costs  has  not  been  attained. 


216  BOOKKEEPING   AND   ACCOUNTANCY 

684.  Scientific  machine  rate  and  supplementary  rate  method.  This  is  a 
method  which  has  been  devised  to  overcome  the  deficiencies  and  inaccuracies 
of  the  other  methods  described  in  the  preceding  paragraphs.  In  this  method, 
labor  value  and  labor  time  are  almost  entirely  eliminated  as  units  of  rneasurement 
in  the  distribution  of  expense  burden,  while,  like  the  machine  rate  method,  it 
utilizes  the  principle  of  machine  time  as  the  unit  of  measurement,  but  it  goes 
much  further  by  providing  for  the  proper  distribution  of  idle  time.  It  regards 
the  shop  or  factory  as  a  collection  of  small  "production  centers,"  each  differing 
from  the  other  in  the  cost  to  operate,  but  with  certain  common  connecting  bonds. 
By  a  production  center  is  meant  either  a  machine  or  a  bench  at  which  work  is 
done  or  it  may  be  an  open  floor  space  used  for  different  purposes.  These  are 
also  designated  as  "productive  factors." 

o.  Factory  expenses,  under  this  plan,  instead  of  being  considered  as  one  lump  sum,  are 
kept  separate,  each  expense  being  subdivided  and  prorated  to  the  various  factors  of  production 
in  the  exact  proportion  that  each  factor  derives  benefit  from  the  expense.  For  instance,  rent  la 
subdivided  and  charged  to  each  productive  factor  in  proportion  to  the  floor  spac^  it  occupies, 
and  so  with  other  items  of  expense,  that  is,  each  production  center,  or  factor  is  charged  with  the 
cost  of  the  different  expense  elements  which  enter  into  the  service  it  renders  in  production. 

h.  These  elements  of  cost  consist  of  the  rent  for  the  space,  power,  light,  hejat,  insurance, 
interest,  depreciation,  repairs  and  maintenance,  and  all  other  items  of  expenditure  necessary 
in  the  operation  of  a  particular  productive  center  for  a  given  period  of  time.  The  sum  of  these 
items  for  a  given  period,  say  a  month  or  a  year,  gives  the  total  cost  of  operating  and  maintaining 
that  particular  productive  center  for  that  time  and,  consequently,  represents  the  cost  of  the 
service  it  renders  as  one  of  the  productive  factors  of  the  establishment.  This  sum,  divided 
by  the  number  of  working  hours  in  the  period,  will  give  the  cost  per  hour  of  the  service  rendered 
by  that  productive  factor  in  the  manufacturing  processes  of  the  establishment. 

c.  One  of  the  objects  of  this  method  is  to  change  practically  all  of  the  ordinary  factory  ex- 
penses represented  in  these  elements  of  cost  from  indirect  to  direct  charges  by  connecting  them 
with  and  including  them  directly  in  the  cost  of  operating  a  particular  machine  or  productive 
center.  Since  by  this  method  each  productive  factor,  or  center,  is  charged  with  its  share  of  the 
different  elements  of  cost,  it  disposes  of  all  factory  expense  by  absorbing  them  in  the  hourly 
machine  rate  chareed  against  the  articles  in  process  of  manufacture,  except  those  expenses 
which  are  of  such  a  general  character  that  they  cannot  be  identified  with  any  particular  order 
or  job,  such  as  idle  machine  or  productive  factor  time,  waste  time,  spoiled  work,  superin- 
tendence, etc.,  all  of  which  are  provided  for  in  a  "supplementary  rate,"  described  in  para- 
graph 684A. 

d.  The  product  of  a  shop  or  factory  in  which  all  the  productive  factors  are  at  work  repre- 
sents its  capacity  for  manufacture.  When  part  of  the  productive  factors  are  idle,  those  in  opera- 
tion reoresent  the  utilized  capacity  of  the  shop  or  factory,  while  those  which  are  idle  represent 
the  wasted  capacity.  Idle  machine  time,  or  waste  time,  as  it  is  frequently  designated,  is,  there- 
fore, the  amount  of  time  the  various  productive  factors  are  not  in  operation,  i.e.,  the  time 
they  are  unemployed. 


mSTrilBUTiON   OF"  INDIKECT   EXPENSES  217 

e.  Many  of  the  elements  of  cost  attaching  to  each  productive  factor  go  on  whether  the  factor 
is  in  service  or  not,  such  as  rent,  insurance,  light,  heat,  interest,  depreciation,  etc.  The  idle 
time  of  a  productive  factor,  therefore,  represents  a  loss  equal  to  the  cost  of  the  various  ele- 
ments of  expense  charged  to  that  factor,  and  if  the  profit  earned  by  those  productive  factors 
which  are  in  operation  is  to  be  saved,  this  loss  must  be  met  by  adding  its  equivalent  to  the  cost 
of  the  goods  in  course  of  manufacture,  which,  of  course,  will  increase  the  normal  cost  of  these 
goods,  the  normal  cost  being  the  cost  when  all  the  productive  factors  are  employed. 

/.  This  added  cost  on  the  normal  cost,  while  it  may  be  distributed  over  the  cost  of  goods  in 
course  of  manufacture,  is,  strictly  speaking,  no  part  of  such  cost  and  merely  shows  the  ratio 
of  ivasted  capacity  to  utilized  capacity,  and  separates  from  the  normal  cost  a  part  of  the  actual 
cost  of  production  which  would  otherwise  be  concealed. 

g.  Wasted  capacity  adds  to  the  production  cost  of  the  articles  in  process  of  manufacture 
in  the  inverse  ratio  of  wasted  capacity  to  the  total  capacity  of  the  shop  or  factory;  for  instance, 
if  a  shop  is  running  at  one-half  its  normal  capacity,  it  will  practically  double  the  cost  of 
production,  outside  of  direct  labor  and  material,  in  those  parts  of  the  shop  that  are  in  opera- 
tion, while,  if  the  shop  is  running  at  one-fourth  its  normal  capacity,  it  will  practically 
increase  the  cost  of  production  to  four  times  the  normal  cost. 

h.  The  supplementary  rate,  referred  to  in  the  heading  to  this  paragraph  (1[684),  takes  care 
of  the  undistributed  balance  of  factory  expenses  due  to  idleness  of  productive  factors  and  waste 
time,  also  of  spoiled  work,  superintendence  or  supervision,  and  such  other  elements  of  cost  as 
are  not  distributed  through  the  established  hourly  machine  rate  for  each  productive  factor. 
The  amount  of  these  expense  charges  to  be  distributed  through  the  supplementary  rate  is  found 
by  deducting  the  total  amount  of  the  charges  against  work  in  process,  for  services  rendered  by 
productive  factors  in  the  manufacturing  processes  of  the  period,  from  the  total  manufacturing 
expenses,  the  difference  being  the  amount  to  be  distributed  through  the  supplementary  rate; 
i.e.,  the  total  manufacturing  expenses,  less  the  total  value  of  the  productive  machine  hours 
for  the  same  period,  equals  the  amount  to  be  distributed  by  the  supplementary  rate.      (117216) 

i.  The  supplementary  rate  is  found  either  by  considermg  it  as  an  additional  hourly  burden 
charge  placed  upon  each  producing  factor  contributing  to  the  work  performed  in  the  period, 
or  it  may  be  reduced  to  a  percentage  of  increase  on  the  amount  already  distributed  by  the 
machine  rate. 

Illustration:  Supposing  it  is  found  that  factory  expense  account  was  charged  during  the 
month  with  items  amounting  to  S170.75.  Machine  No.  1  worked  140  hours  at  30^  =  $42  for  the 
month;  machine  No.  2  worked  150  hours  at  25^  =  $37.50  for  the  month;  machine  No.  3  worked 
260  hours  at  20^  =  $52  for  the  month;  machine  No.  4  worked  175  hours  at  10^  =  $17.50.  Total 
hours,  725;  total  amount  distributed,  $149.  The  total  charge  to  factory  expense,  $170.75,  less 
the  amount  distributed,  $149,  equals  $21.75  yet  to  be  distributed.  This  is  the  amount  which 
is  to  be  distributed  through  the  supplementary  rate  by  either  one  of  two  methods. 

It  may  be  treated  as  an  hourly  burden,  the  amount  to  be  added  to  each  productive  hour, 
which  is  found  by  dividing  $21.75  by  725,  or  3^  per  hour,  which  should  then  be  added  to  the 
hourly  machine  rate  on  each  article  manufactursd  during  the  month;  for  instance,  the  rate  for 
machine  No.  1  would  be  43<^  instead  of  40«^. 


218  BOOKKEEPING   AND   ACCOUNTANCY 

Or  the  balance,  $21.75,  may  be  reduced  to  a  -percentage  of  the  amount  already  distributed; 
thus,  $21.75  -f-  149,  the  expense  burden  already  distributed,  =  \^%.  Therefore,  if  the 
machine  rate  charge  against  a  given  order  was  $25,  14^%  of  that  amount,  or  $3.63,  would  be 
added,  making  a  total  of  $28.63.  Under  this  latter  plan,  the  calculation  is  reduced  to  a  very 
simple  matter. 

It  will  be  seen  that  by  either  method  the  supplementary  rate  is  very  easily  disposed  of, 
and  where  the  operations  of  a  given  shop  or  factory  continue  in  a  fair  ratio  of  regularity,  either 
the  increased  hourly  rate  for  each  productive  factor  or  the  increased  percentage  on  the  total 
machine  rate  charge  may  be  added  to  each  order.  Where  there  is  a  considerable  variation  in  the 
time  the  productive  factors  are  employed  in  different  months  or  in  the  unproductive  or  waste 
hours,  it  is  necessary  to  establish  a  separate  rate  for  each  month  either  in  the  form  of  an 
hourly  machine  charge  or  a  percentage  of  the  total  machine  charges  against  each  order. 

j.  The  scientific  machine  rate  and  supplementary  rate  method  is  ably  presented  and  dis- 
cusbed  by  A.  Hamilton  Church  (see  1f679),  and  as  it  is  the  most  nearly  scientific  method  yet 
discovered,  it  is  worthy  of  careful  study  and  consideration.  It  rests  on  the  principle  that 
organization  is  the  fundamental  basis  of  satisfactory  cost  records,  and  that  the  best  system  of 
costs  cannot  do  more  than  give  the  results  whiuh  naturally  follow  the  kind  of  organization  in 
force,  whether  good  or  poor,  and  that,  consequently,  the  most  satisfactory  results  can  be  secured 
only  through  the  most  efficient  organization. 

685.  Organization,  in  a  manufacturing  sense,  is  defined  as  being  the  ways 
and  means  adopted  and  followed  to  secure  efficient  'production,  while  the  true 
object  of  cost  accounts  is  to  register  and  record  every  stage  and  step  of  production 
as  it  actually  happened,  with  the  natural  consequence  that  when  deficiencies  in 
organization  are  discovered,  they  may  be  corrected :  so  that  organization  and  cost 
accounting  are  co-operative,  one  benefiting  the  other,  both  of  them  being  of 
the  highest  importance  in  the  economical  production  of  manufactured  goods. 

685a.  Distribution  of  Costs,  The  illustration  on  the  opposite  page  shows 
the  method  for  assigning  to  each  productive  factor  its  proportion  of  the  different 
cost  elements  of  factory  expense.  In  the  illustration,  but  six  producing  factors 
are  shown.  In  many  factories,  shops  or  works  there  may  be  a  hundred  or  more 
such  productive  factors  in  the  various  departments,  but  the  method  of  ascer- 
taining the  cost  of  each  productive  factor  is  the  same  whether  there  are  few  or 
many.  In  the  illustration  it  will  be  noted  that  four  of  the  productive  factors 
are  machines,  the  fifth  is  a  workman  s  bench  for  hand  work,  and  the  sixth  is 
a  vacant  space  used  for  assembling  parts  and  other  similar  purposes. 


DISTRIBUTION    OF    INDIRECT   EXPENSES 


219 


Tllubthation  102 


Shop  Floor  Plan        60   ft. 


(1) 
Uachlne 
ICO  sq.    ft. 
$500 


(4) 
Uachine 
75  Bq.   ft. 
$250 


(2) 
Wort  bench 
300  eq.    ft. 


(3) 
Uachine 
150  sq. 
$750 


(5) 
uachine 
225  sq.   ft. 
$1750 


Tool 

Doom 

50  8.  f. 


(6) 
.Assembling 
150  80.  ft. 


Stock  Ecom 
150  sq.  ft. 


Explanation:  This  floor  plan  shows  a  space  60  feet  long  and  20  feet  wide,  or  1200  square 
feet.  The  tool  room  and  stock-room  occupy  200  square  feet,  leaving  1000  square  feet  occupied 
by  the  six  productive  factors.  The  number  of  square  feet  occupied  by  each  factor  is  shown. 
The  value  of  each  machine  is  also  shown,  taken  from  the  inventory,  at  cost  price.  The  same 
method  of  procedure  would  apply  to  any  other  space  or  number  of  floors  occupied  for  factory 
purposes. 


Illustration  102a 

ESTIMATE  OF  UAUUFACTUPIHG  EXPENSES  FOR  THE  TEAR  BEGlimiHG  JAH.'l,   19 


(PAE.   720,  752) 


eoo. 

50. 
375. 

45. 

65. 
750. 

75. 
420. 
150. 
900. 
420. 
400. 


4450. 


370.83 
.161/2 


Rent  of  factory  apace,   60  x  20  ft. 

Li^t  and  hoat    (par  cost   of  provioua  year) 

Power   (4  macMnea,  per  meter  record  for  last  year) 

Tajces    (per  laat  year's  assessment) 

Insurance  on  plant 

Repairs  and  renewals  on  machines    (estimated  on  prevlotis  oipendltttros) 

STJpplios,   oils,   etc. 

Depreciation  and  interest  on  plant 

Tool  room  charges  for  repairs,  etc. 

Superintendence 

Incidental  labor 

Overhead  management  and  exi)en3e 

Ifonthly  average    {4450 -M2) 

Hourly  average   (based  on  2700  working  hours  in  year) 


(a)  Illustration  102a  shows  the  estimate  of  manufacturing  expenses  made  up  at  the  begin- 
ning of  the  fiscal  period  (K  720)  as  it  would  appear  in  the  manufacturing  expense  estimate  book 

^1(752) 

(6)  Illustration  102b  shows  the  distribution  of  these  expenses  to  the  various  productive 
factors  or  centers,  with  the  yearly,  monthly,  and  hourly  cost  of  operating  each  factor.  It  will 
be  seen  that  the  items  for  rent,  light  and  heat,  and  taxes  are  distributed  in  the  proportion 
of  the  number  of  square  feet  occupied  by  each  factor  to  the  total  number  of  square  feet  (1000) 
occupied  by  all  of  the  factors.  Power  is  usually  distributed  in  the  proportion  of  the  horse- 
power of  each  machine  to  the  total  horse-power  used,  although  when  electricity  is  the  power 
and  each  factor  has  its  own  dynamo,  this  charge  may  be  accurately  ascertained  by  a  separate 
meter  for  each  machine.  Insurance,  repairs  and  renewals,  supplies,  oils,  etc.,  depreciation 
and  interest,  tool  repairs,  superintendence,  and  incidental  labor  are  distributed  by  special  deter- 
mination of  the  proper  cost  to  be  allotted  to  each  fa  ctor;  for  instance,  insurance  is  usually  allot- 


220 


BOOKKEEPING  AND   ACCOUNTANCY 


Illdstbation  102b 


DISTRIBUTION  OF  ESTIMATED  KAKUFACTOiaNG  EZPEKSES  FOR  YEAE  19     . 

SHCWING  OPEEATIUG 

COST  OF  EACH  PRODUCTIVE  FACTOR  FOB  THE  PERIOD. 

Productive   faetn 

rs 

Items 

Total 

1. 

2. 

3. 

4. 

5. 

6. 

Rent 

800. 

80. 

240. 

120. 

60. 

180. 

120. 

Light  and  heat 

50. 

6. 

15. 

7.50 

3.75 

11.25 

7.50 

Power 

375. 

41.75 

93. 

26.60 

213.65 

1 

Taxes 

45. 

4.50 

13.50 

6.75 

3.38 

10.12 

6.75 

Inauranoe 

65. 

10. 

15. 

5. 

35. 

Bepalrs  and  renewals 

750. 

41.66 

83.33 

166.67 

125. 

291.67 

41.67 

' 

Supplies,  oils,  etc. 

75. 

3.50 

5. 

30. 

5. 

25. 

6.50 

1 

Depreciation  and  Interest 

420. 

160. 

60. 

70. 

130. 

Tool  repairs,  etc. 

150. 

25. 

12.50 

37.50 

18.75 

56.25 

Superintendence 

900. 

60. 

300. 

60. 

60. 

180. 

240. 

Incidental  labor,  helporo,  ©to 

420. 

21. 

52.50 

21. 

10.50 

105. 

210. 

Overhead  expenses 
Yearly  cost 
Ave  rage  monthly  cost 
Hourly  cost,  basis  of  2700 

400. 

66.67 

65.67 

66.67 

66.66 

66.67 

66.66 

4450. 

519.08 

786.50 

684.09 

454.64 

1304.61 

699.08 

370.63- 

43.27- 

-     65.75 

57.- 

37.89 

108.72 

^     58.26- 

working  hours  per  jrear 

1.65 

.19>          .29j*         .25+ 

17 ^            .48 

■f         .25  + 

ted  to  each  factor  in  the  proportion  of  the  value  of  that  factor  to  the  total  value  of  the  faC' 
tors  insured.  Repairs  and  renewals  must  necessarily  be  allotted  to  each  factor  in  proportion 
to  the  cost  of  maintaining  that  factor,  based  upon  previous  experience  or  costs.  The  same 
is  true  of  suppHes,  oils,  etc.,  and  tool  repairs.  Depreciation  and  interest  are  figured  upon  a 
certain  percentage  of  the  cost  of  each  machine  and  other  depreciable  equipment.  The  expense 
of  superintendence  and  incidental  labor  is  distributed  in  the  proportion  of  the  total  time 
that  each  factor  requires  in  its  operation.  Overhead  expenses  are  usually  distributed  equally 
over  the  various  factors,  but  they  may  be  distributed  in  different  proportions  where  any  part 
of  this  expense  can  be  properly  allocated  to  a  particular  factor  or  factors. 

(c)  The  hourly  machine  rate  for  each  factor  shown  on  the  statement  is  the  cost  of  oper- 
ating that  factor.  (1[684d)  When  part  of  the  factors  are  idle,  idle  tune  and  other  cost 
elements  do  not  increase  the  production  cost  of  those  factors  which  are  in  operation,  but 
they  do  increase  the  production  cost  of  the  factory,  i.  e.,  each  article  will  cost  more  to  make. 

(d)  On  the  statement  showing  the  distribution  of  the  estimated  manufacturing  expenses 
for  the  year,  the  average  monthly  and  hourly  operating  cost  of  each  factor  is  shown.  This  is 
known  as  the  "production  cost"  of  each  factor,  to  which  must  be  added  such  additional  costs, 
determined  through  the  supplementary  rate,  as  will  cover  the  loss  from  unproductive  factors 
and  other  sources  to  find  the  hourly  charge  for  work  performed  on  any  order  or  job  by  each 
productive  factor.     (1|G84i) 

(e)  When  the  cost  of  operating  any  particular  productive  factor  increases  or  decreases 
because  of  unexpected  or  contingent  circumstances,  the  monthly  and  also  the  hourly  produc- 
tion cost  should  be  increased  or  decreased  accordingly. 

To  illustrate,  the  hourly  production  cost  of  factor  No.  1  is  shown  in  the  statement  to  be 
IH.  Supposing  an  additional  charge  of  7  cents  per  hour,  determined  by  the  supplementary 
rate,  is  necessary  to  cover  the  cost  of  idle  factors,  etc.,  the  hourly  charge  for  factor  No.  1  i.- 
26$^.  When  more  productive  factors  are  in  operation,  this  hourly  rate  for  machine  No.  1  would 
he  lowerml.  When  fewer  factors  are  in  operation,  it  would  be  increased,  and  the  same  would 
be  true  of  all  thc^-  factors.  If  any  of  the  elements  of  cost  in  the  estimate  of  manufacturing 
r:tpenses  for  the  period  are  increased  or  daninishcd,  corrections  should  be  made  in  the  hourly 
production  cost  of  each  factor  accordingly. 


THE   DEPARTMENT   METHOD   OF   MANUFACTURING   ACCOUNTS  221 

METHODS  AND  SYSTEMS  IN  MANUFACTURING  ACCOUNTS. 

686.  Methods  and  systems  of  conducting  manufacturing  accounts  vary 
greatly,  depending  upon  the  nature  and  extent  of  the  business  conducted,  and 
more  particularly  upon  the  U7iits  of  information  which  the  accounts  are  intended 
to  supply. 

687.  There  are  two  principal  methods  of  conducting  manufacturing 
accounts,  one  which  may  be  designated  as  the  "department"  method  and  the 
other  as  the  "cost"  method. 

688  In  the  department  method,  the  accounts  are  planned  to  show  the 
cost  of  operating  an  entire  shop  or  factory,  or  some  department  of  it,  including  the 
cost  of  the  labor  and  the  various  materials  and  expenses,  the  object  being  to  show 
the  gross  manufacturing  cost  of  the  shop,  factory  or  de-partment  for  a  given  period 
and,  finally,  the  gross  profit  on  the  manufactured  goods  sold. 

689.  In  the  cost  method,  the  accounts  are  planned  to  show  the  manufact- 
uring or  production  cost  of  the  articles  called  for  in  a  particular  order,  job  or 
contract,  without  reference  to  the  profit  of  a  particular  shop  or  department,  the 
object  being  to  show  the  total  cost  of  each  order,  job  or  contract  and,  finally, 
the  gross  profit  between  cost  and  selling  price. 

690.  It  is  not  impossible  to  construct  a  system  of  accounts  that  will  show 
both  department  and  cost  accounts  in  the  same  set  of  books;  indeed,  in  the  books 
of  many  of  the  best  organized  manufacturing  concerns,  where  the  product  is 
at  all  varied  in  its  character,  the  books  are  kept  to  show  the  results  of  both 
methods. 

THE  DEPARTMENT  METHOD  OF  MANUFACTURING  ACCOUNTS. 

691.  When  the  department  method  is  followed,  which  has  for  its  unit  of 
consideration  the  plant,  factory  or  department,  if  it  is  desired  to  show  only  the 
gross  cost  and  the  grqss  profit  derived  therefrom  for  the  period,  it  is  necessary 
to  open  a  single  account,  only  which  is  debited  for  all  costs,  including  materials, 
labor  and  expenses.  If  it  is  desired  to  know  the  seplirate  costs  of  the  materials, 
labor  and  expenses,  an  account  should  be  kept  with  each.  If  there  are  several 
materials,  various  expenses  or  other  elements  of  cost  entering  into  the  finished 
product,  and  it  is  desired  to  know  the  cost  of  each,  separate  account  should  be  kept 
with  them  or  they  should  be  separated  on  analysis  sheets  before  the  manufacturing 
statement  is  prepared. 


222  BOOKKEEPING   AND   ACCOUNTANCY 

692.  Manufacturing  accounts  of  this  description  are  in  all  essential  partic- 
ulars similar  to  the  ordinary  trading  accounts,  and  when  kept  in  connection  with 
the  proper  sales  accounts,  the  gross  profit  of  a  plant,  factory,  shop  or  depart- 
ment can  be  readily  and  accurately  ascertained.  By  opening  the  necessary 
accounts,  the  manufacturing  statements  can  be  made  to  show  the  results  of  the 
transactions  for  the  period  in  whatever  detail  is  desired.  Where  accounts  are 
kept  for  a  number  of  departments  in  the  same  establishment,  they  closely  resem- 
ble the  accounts  of  a  department  store  in  a  trading  business. 

693.  When  the  department  method  of  conducting  manufacturing  accounts 
is  followed,  it  is  frequently  supplemented  by  cost  sheets  and  other  memorandums 
which  are  depended  upon  for  figuring  the  costs  and  the  selling  prices  of  the  differ- 
ent articles  manufactured.  In  many  instances  fairly  efficient  cost  systems  are 
thus  maintained. 

Rules  for  Debiting  and  Crediting  Manufacturing  Accounts  whbn  the 
Department  Method  is  Followed. 

694.  The  following  rules  are  for  accounts  opened  under  the  department  plan, 
where  the  balances  shown  by  the  various  material,  labor  and  expense  accounts, 
after  being  credited  with  inventories,  represent  the  various  elements  of  cost  that 
enter  into  and  make  up  the  total  manufacturing  cost.  These  accounts  and  the  rules 
therefor  should  not  be  confused  with  those  given  when  the  cost  method  is  followed. 

HuLE  FOR  Debiting  and  Crediting  Material  Accounts  When  Kept  to 
Show  the  Cost  of  Material  Used. 

695a.  Debit  material  accounts,  under  proper  headings,  for  costs  of  all  material  purchased, 
including  freight,  drayage,  and  all  other  charges  necessary  to  place  the  material  in  the  factory 
ready  for  use. 

6.  Credit  material  accounts  for  all  deductions  from  cost,  and  at  cost  price  for  all  materials 
previously  charged  to  this  account  which  are  sold  or  otherwise  disposed  of. 

c.  The  balance,  less  the  inventory  of  materials  on  hiind  taken  at  cost,  shows  the  cost  of 
the  material 'U«e<i  up  in  the  goods  manufactured  for  the  period. 

696.  Pay-roll  and  time  cards.  A  time  card  is  usually  provided  for  each 
workman  in  an  establishment  on  which  a  record  is  kept  of  his  time  and  the  purpose 
for  which  it  was  employed.  From  these  time  cards  the  pay-roll  and  pay-roll 
distribution  sheets  are  made  up.  There  are  many  different  forms  of  both  time 
cards  and  pay-rolls.  A  pay-roll  is  not  infrequently  bound  in  book  form,  and  is 
sometimes  combined  with  a  form  of  time  card.     In  other  instances  the  time  shown 


THE    COST   METHOD    OF   M.\NUFACTUBING   ACCOUNTS  223 

by  time  cards  is  recorded  in  a  time  book,  from  which  the  pay-roll  is  later  made  up. 
The  proper  design  of  these  cards  and  books  is  determined  by  the  requirements  of 
the  particular  business  for  which  they  are  intended,  and  by  the  kind  of  mechan- 
ical time-recording  system  used  if  such  a  system  is  employed. 

Rule  for  Debiting  and  Crediting  Labor  Accounts  When  Kept  to  Show 
THE  Cost  of  Labor  Employed  in  a  Given  Shop,  Factory  or  Department. 

697a,  Debit  labor  account  for  the  cost  of  all  labor  employed  in  manufacturing  the  goods 
of  a  shop,  factory  or  department  for  the  period. 

b.  Credit  the  account  for  the  value  of  any  labor  employed  elsewhere  which  is  charged  to 
this  account. 

c.  The  balance  shows  the  cost  of  the  labor  employed  in  manufacturing  the  goods  of  the 
shop,  factory  or  department  for  the  period. 

d.  Note — The  labor  account  described  above  must  not  be  confused  with  the  labor  account 
described  in  ^[563.  That  account  is  really  an  adjusting  account  between  the  pay-roll  and  the 
various  accounts  to  which  the  cost  of  labor  is  finally  charged,  and  should  be  opened  under  the 
title  of  "pay-roll"  account  when  kept  in  connection  with  the  account  described  above. 

698.  Manufacturing  expenses.     These  expenses  are  described  in  ^685. 

699.  Rule  for  Debiting  and  Crediting  Manufacturing  Expense 
Accounts. 

a.  Debit  manufacturing  expenses,  under  proper  headings,  for  the  cost  of  all  expenses 
incurred  in  operating  the  shop,  factory  or  department. 

b.  Credit  the  account  for  any  returns  from  expense  items  charged  to  the  account. 

c.  The  balance  shows  the  cost  of  the  expenses  incurred  in  connection  with  the  manufacture 
of  the  goods  of  the  shop,  factory  or  department  for  the  period. 

THE  COST  METHOD  OF  MANUFACTURING  ACCOUNTS. 

700.  When  the  cost  method  is  followed,  which  has  for  its  unit  of  considera- 
tion the  manufacturing  cost  of  the  articles  called  for  in  each  order,  job  or  contract, 
it  is  necessary  to  devise  a  system  of  cost  records  and  accounts  that  will  show  in 
detail  the  elements  of  cost  entering  into  each  order,  job  or  contract  from  the  time 
it  is  begun  until  it  is  completed.  Such  a  system  differs  in  many  important  par- 
ticulars from  a  system  that  would  meet  the  requirements  when  the  department 
method  alone  is  followed,  notably  in  the  treatment  of  material,  labor  and 
expense  accounts,  and  especially  if  the  cost  records  and  accounts  are  to  be 
supported  by  controlling  accounts  in  the  general  ledger. 


224  BOOKKEEPING   AND    ACCOUNTANCY 

701.  The  cost  method  of  accounts  is  associated  with  and  is  the  necessary 
complement  of  what  is  popularly  termed  "cost  accounting,"  which  is,  speaking 
more  accurately,  cost  finding  and  cost  distributing,  and  is,  therefore,  as  much  a 
question  of  shop  management  and  a  proper  analysis  of  shop  conditions  and 
records  as  it  is  of  pure  bookkeeping.  This  important  subject  is  treated  in  a 
separate  chapter,  beginning  with  1[647. 

702.  The  principal  manufacturing  accounts,  under  the  cost  method,  are 

designed  with  the  double  purpose  of  showing  costs  of  materials,  labor,  manu- 
facturing expenses,  etc.,  and  of  acting  as  control  accounts  for  inventories 
and  the  various  supplementary  accounts  in  the  factory  books.  These  accounts 
are  given  various  names  by  different  accountants,  but  in  this  text  they  are 
designated  as  "materials"  account  (^704),  "materials  in  process"  account  (^710), 
"productive  labor"  account  (1[714),  "manufacturing  expense,"  or  "factors 
expense"account  (Tf719),  "factory  expenses"  account  (^732),  "finished  goods" 
account  (^740),  "sales"  account  (^745),  and  "cost  of  goods  sold"  account  (^745). 
"  Idle  productive  factors"  account  is  an  account  that  is  sometimes  kept,  which 
is  debited  for  idle  time  of  productive  factors  ascertained  from  daily  reports 
of  idle  machine  hours,  and  is  credited  for  the  same  amount  when  the  idle  time  is 
distributed  over  work  in  process  through  the  supplementary  rate.  This  account 
would,  therefore^  show  in  one  item,  monthly,  the  lost  time,  or,  more  properly 
the  lost  efficie7icy  of  the  works  or  shop;  but  the  same  result  may  be  ascertained  in 
another  way,  as  is  described  in  1[724.     This  account  is  not  shown  in  this  text. 

MANUFACTURING  ACCOUNTS  WHEN  THE  COST  METHOD 

IS  FOLLOWED. 

703.  A  comparison  of  the  following  rules  with  those  given  for  manufacturing 
accounts  when  the  department  method  is  followed,  will  show  a  number  of  impor- 
tant differences,  and  care  should  be  exercised  not  to  confuse  them.     (1[694) 

704.  Materials,  under  the  cost  method  of  accounts,  include  all  materials  of 
every  kind  and  description  purchased  to  be  used  in  the  manufacture  of  the  articles 
for  which  the  concern  is  conducted.  Many  accountants  class  materials  under  the 
head  of  'stores"  to  distinguish  them  from  "stock"  which  is  used  to  designate 
finished  manufactured  goods.  Usually  but  one  "materials"  account  is  necessary, 
whether  one  or  more  manufacturing  departments  are  maintained,  except  where 
separate  g:roups  of  accounts  are  kept  for  each  department.  Materials  account, 
onntrnls  the  stores,  or  stock  ledger.     (1[708) 


THE   COST   METHOD   OF   MANUFACTURING   ACCOUNTS 


225 


Rule  for  Debiting  and  Crediting    Materials  Account  When  the  Cost 

Method  is  Followed. 


706.  Credit  "materials"  account, — 
c.  For  all  materials  taken  from  the  stock- 
room on  requisition  for  work  in  proc- 
ess, called  for  on  requisition  blanks, 
per  transfer  outward  journal,  at  cost. 
(11748) 

For  all  materials  taken  from  the  stock- 
room on  requisition,  when  disposed  of 
by  sale  or  otherwise  than  for  work  in 
process,  at  cost  per  transfer  outsvard 
journal. 


d 


705.     Debit  "materials"  account, — 

a.  For  the  cost  of  all  materials  purchased 
which  enter  directly  into  the  goods 
manufactured,  including  freight,  dray- 
age,  and  all  other  charges  neoessary  to 
place  the  materials  in  the  stock-room 
r^ady  for  use,  as  per  invoice,  or  pur- 
chasi^s  journal  or  vouchers  payable 
register.     (11747) 

h.  For  all  materials  returned  to  the  stock- 
roo  a  frpm  work  in  process  which  had 
been  credited  previously  to  this  ac- 
count, as  shown  on  "stores  returned" 
blanks,  per  transfer  inward  journal. 
(11749) 

707.  The  balance  of  the  account  shows  the  cost  of  the  materials  on  hand, 
which  should  equal  the  value  of  the  stock  on  hand  shown  by  inventory  and  by 
the  material,  or  stock  ledger. 

708.  Material,  stock,  or  stores  ledger.  This  is  a  subordinate  ledger,  usually 
kept  by  the  stock  clerk,  of  which  the  materials  account  in  the  general  ledger 
described  above  is  the  controlling  account,  in  which  a  record  is  kept  of  all  materials 
purchased  and  of  all  materials  issued  upon  requisition.  Under  appropriate  head- 
ings, accounts  are  opened  for  each  kind  of  material,  the  number  and  cost  price 
of  the  items  received  being  entered  on  the  debit  side,  and  the  number  of  items 
and  cost  price  of  the  materials  issued  upon  requisition  being  entered  on  the  credit 
?ide.  The  difference  between  the  number  of  items  of  each  kind  received  and 
issued  must  equal  the  number  of  items  on  hand  in  the  stockroom,  and  the 
difference  betwe*en  the  cost  price  of  the  materials  purchased  and  the  cost  price  of 
the  materials  issued  on  requisition  must  equal  the  balance  shown  by  the  materials 
account  in  the  general  ledger.  Thus,  it  will  be  seen,  two  checks  are  had — one 
from  the  general  ledger  and  another  from  the  inventory.  This  ledger  may  also 
be  used  when  the  department  method  is  followed.  It  receives  its  entries  for  the 
debit  items  from  the  invoice,  or  purchases  journal,  and  from  the  transfer  inward 
journal.     (1f747,  749)     Credits  come  from  the  transfer  outward  journal. 


226  bookki-:eping  and  accountancy 

Work  in  Process. 

709.  "Work  in  process"  is  a  term  used  in  manufacturing  establishments  to 
indicate  all  articles  in  process  of  manufacture.  It  covers  materials  and  direct 
iabor  required  for  the  work  in  process,  as  well  as  manufacturing  expenses,  from 
the  time  the  materials  are  received  from  the  store-room  until  the  time  the  finished 
articles  called  for  in  the  order,  job  or  contract  are  delivered  to  the  warehouse, 
sales-room  or  shipping  department.  "Work  in  process,"  therefore,  involves 
three  accounts — "materials  in  process"  account,  "labor"  account  and  "manufac- 
turing expenses"  account. 

Materials  in  Process. 

710.  "Materials  in  process"  refers  to  the  materials  in  the  work-shop  as 
distinguished  from  the  materials  in  the  store-room.  In  this  account  is  recorded 
the  cost  of  the  materials  used  in  the  orders,  jobs  or  contracts  in  process  which, 
with  the  cost  of  the  labor,  makes  up  the  prime  cost  of  the  goods  manufactured. 

Rule  for  Debiting  and  Crediting  "Materials  in  Process"  Account 
When  the  Cost  Method  is  Followed. 

711.     Debit    "materials    in    process"    ac-  712.     Credit    "materials    in    process"    ac- 

count,—  count, — 

a.     For    all    materials    received    fronJ    the  b.     For  all  materials  returned  to  the  stock- 

stock-room  on  requisition,  at  cost  price,  room,  at  cost  price,  which  were  previ- 

as  shown  by  requisition  orders  per  the  ously  debited  to  this  account,  as  shown 

transfer  outward  journal.     (11748)  on  "stock  returned"  cards  per  the  trans- 

fer inward  journal.  (11749) 
c.  For  the  cost  of  materials  used  on  each 
order,  job  or  contract  when  completed 
and  the  finished  goods  are  ready  for 
sale  or  delivery  or  have  been  placed  in 
warehouse,  as  shown  by  "factory  cost" 
cards  or  job  ledger  per  the  finished  goods 
journal.     (11750) 

713.  The  balance  of  the  account  shows  the  cost  of  the  materials  in  the 
uncompleted  work  in  process,  and  should  equal  the  sum  of  the  charges  for  materials 
on  the  shop  cards  or  job  ledger  for  all  uncompleted  orders,  jobs  or  contracts;  i.e., 
it  should  equal  the  inventory,  and  the  account  should  balance  after  the  inventory 
is  entered.  (^754b)  This  account,  therefore,  controls  the  charges  for  materials 
on  cost  cards  and  requires  that  all  materials  received  from  the  stock-room 
shall  be  accounted  for. 


the  cost  method  of  manufacturing  accounts  227 

Labor. 

714.  Labor,  under  the  cost  method  of  accounts,  is  usually  understood 
to  refer  to  the  labor  which  is  employed  directly  in  the  manufacture  of  a  particular 
order,  job  or  contract.  This  is  known  as  direct*  labor,  to  distinguish  it  from 
indirect  labor,  which  is  a  part  of  factory  expense  and  will  be  described  under 
factory  expense  account.  It  is  the  labor  which,  added  to  cost  of  materials, 
gives  the  prime  cost.  (1[664)  The  account  is  kept  under  the  head  of  "labor," 
or  "  productive  labor"  account,  and  should  be  distinguished  from  accounts  under 
similar  names  described  in  ^[563  and  ^697. 

715.  Pay-roll  and  time  cards.  These  are  described  in  1[696.  The  time 
of  each  workman  is  kept  by  the  foreman  or,  in  large  estabhshments,  by  a  time 
clerk,  although  in  some  concerns  the  workman  himself  makes  the  record  of  his 
time  and  the  purpose  for  which  it  was  expended,  in  which  case  the  time  card 
should  be  O.K.'d  by  his  foreman.  It  is  from  the  time  cards  that  the  time  expended 
on  each  order,  job  or  contract  is  entered  on  the  cost  card  or  in  the  job  ledger, 
whichever  is  kept,  and  it  is  from  the  same  cards  that  the  pay-roll  is  made  up, 
usually  weekly  or  monthly,  or  as  frequently  as  the  workmen  are  paid. 

Rule  for  Debiting  and  Crediting  Productive,  or  Direct  Labor  Account 
When  the  Cost  Method  is  Followed. 

716.     Debit  "labor"  account,—  717.     Credit  "labor"  account,— 

a.     For  all  sums  paid  to  workmen,  in  cash  b.     For  all  direct  labor  expended  on  goods 

or  its  equivalent,   for  direct  labor,  as  completed,   manufactured  during    the 

shown  by  the  pay-roll  or  time  cards.  period,   as  shown  by  the  factory  cost 

cards,  per  the  finished  goods  journal. 

718.  The  balance  of  the  account  shows  the  amount  of  labor  which  has 
been  expended  on  uncompleted  work  in  process,  which  should  equal  the  sum  of 
the  items  for  direct  labor  on  the  cost  cards  of  uncompleted  work,  i.e.,  should 
equal  the  present  inventory.  (1[754c)  This  account,  therefore,  controls  the 
charges  for  direct  labor  on  the  cost  cards,  and  requires  that  all  time  charged  on 
the  pay-roll  be  accounted  for. 

*Direct  labor  is  so  named  because  it  is  expended  directly  on  a  particular  article  or  job. 
Indirect  labor,  on  the  other  hand,  is  labor  that  is  general  in  its  character  and  cannot  be 
connected  with  any  particular  article  or  job,  such  as  cleaning  shop,  distributing  tools,  etc. 


228 


BOOKKEEPING   AND    ACCOUNTANCY 


Manufacturing  Expenses. 

719.  "Manufacturing  expenses"  is  a  term  used  to  designate  the  actual 
expenses  chargeable  against  work  in  process  on  shop  cards  while  the  work  is 
going  through  the  work-shop  in  course  of  manufacture  or  when  completed,  to 
distinguish  them  from  factory  expenses,  which  are  included  in  a  general  account 
described  in  ^732.  When  the  "scientific  machine  rate,"  the  "productive  fac- 
tor," or  the  "productive  center"  method  is  used  for  the  chstribution  of  manu- 
facturing expenses  (burden  and  overhead),  this  account  may  be  designated  under 
the  title  of  "factors  expense"  account.  When  any  one  of  these  methods  is  used, 
the  hourly  machine  or  productive  factor  charges  are  usually  made  concurrently  on 
cost  cards  with  the  charges  for  materials  and  labor,  and  when  added  to  cost  of 
materials  and  labor  give  the  factory  cost  or  cost  of  productio7i.  (1[664)  When 
other  methods  for  distributing  manufacturing  expenses  are  employed,  they  are 
not  charged  to  the  order,  job  or  contract  until  it  has  been  completed  and  the  total 
labor  time,  labor  cost  or  material  cost  has  been  determined. 

720.  Estimates  of  manufacturing  expenses,  usually  based  upon  the  cost 
of  these  experises  for  previous  periods,  are  required  to  ascertain  the  amount  of 
these  expenses  which  is  to  be  distributed  for  the  present  period.  Such  an  esti- 
mate is  knowni  as  a  schedule  or  inventory  of  expenditures,  and  is  usually  made 
up  at  the  beginning  of  each  succeeding  period.  It  is  frequently  designated  as  the 
"manufacturing  expense  budget,"  and  is  made  up  of  all  the  various  burden  and 
overhead  expenses  which  are  to  be  included  in  the  cost  of  manufacture  and  dis- 
tributed over  the  various  jobs,  orders  or  contracts  for  the  period.  When  the  esti- 
mated manufacturing  expenses  for  a  given  period  have  been  determined,  they  are 
then  divided  by  the  number  of  monthly  periods  included  in  the  estimate.  (^752) 

Rule  tur  Debiting  and  Crediting  Manufacturing,  or  Factors 
Expense  Account. 


721.  Debit  'manufacturing,"  or  "fac- 
tors" expense  account, — 

a.  For  the  estimated  amount  of  manufac- 
turing expenses,  at  cost,  for  the  week, 
month  or  other  period,  per  schedule  at 
commencement  of  period.      (1[720,  752) 

f>.  For  such  an  amount  as  will  meet  the  de- 
ficit caused  by  an  under -esiimale  of  ex- 
penses for  the  period  or  for  the  amount 
necessary  to  provide  for  the  supplemen- 
tary rate  to  be  charged  to  work  in 
process.     i%84:h,i) 


722.  Credit  "manufacturing,"  or  "fac- 
tors" expense  account, — 

c.  For  the  amount  of  manufacturing  ex- 
penses, at  cost,  distributed  and  charged 
to  orders,  jobs  or  contracts  as  they  are 
in  process  or  when  completed  during 
the  period,  as  shown  by  factory  cost 
cards,  per  finished  goods  journal. 
(11750) 

d.  For  such  an  amount  as  will  equal  an 
overcharge  to  the  account  caused  bj' 
an  over-estimate  of  the  expenses  for  che 
period,  transferred  to  following  pef-lod. 


THE    COST   MrrrHOD    OF    MANUFACTURING   ACCOUNTS  220 

723.  The  balance  of  the  account,  shows  t!io  cost  of  tlio  manufacturing  ex- 
penses that  have  been  charged  or  are  yet  to  be  charged  on  the  cost  cards  of  the 
various  unfinished  orders,  jobs  or  contracts,  at  the  close  of  the  period,  i.e.,  it 
should  equal  the  inventory  of  this  account.  (^754dj  Any  difference  between 
the  balance  of  the  account  and  the  inventory  will  show  an  over-  or  under-estimate 
of  manufacturing  expenses  for  the  period — an  over-estimate  if  the  balance  is 
the  larger,  an  under-estimate  if  the  inventory  is  the  larger. 

723a.  Items  %721a,  h,  may  he  and  frequently  are  omitted  by  omitting  the 
entry  from  the  manufacturing  expense  estimate  book  debiting  manufacturing 
or  factors  expense  account  and  crediting  factory  expense  account  for  the  estimated 
expenses  for  the  month  or  other  period.     (Read  ^752) 

7236.  If  the  entries  required  for  721a,  b,  are  omitted  the  balance  will  then 
show  the  cost  of  the  factory  expenses  distributed  for  the  period.  This  balance 
should  substantially  equal  the  balance  shown  by  its  contra  account,  "factory  ex- 
pense" account,  described  in  ^736,  when  the  items  called  for  in  ^IZbd  are  omitted. 
Any  difference  would  show  over-  or  under-distribution  of  manufacturing  expenses, 
described  in  ^[723. 

724.  If  manufacturing  expenses  are  distributed  through  hourly  machine, 
productive  factor,  or  productive  ceviter  time,  in  which  case  the  account  should 
be  kept  under  the  title  of  "Factors  Expense"  (^719),  the  balance  of  the  account 
will  include  the  value  of  the  idle,  or  unproductive  time  of  machine  factors  or 
centers,  unless  the  idle  time  has  been  distributed  monthly  in  the  supplementary 
rate.  This  idle  time  may  be  accounted  for  by  a  daily  shop  record  of  the  idle 
time  of  each  machine,  factor  or  center,  in  a  separate  book  kept  for  that  purpose, 
which  should  be  totaled  for  the  month.  This  total  is  an  unfailing  barometer  of 
the  productive  efficiency  of  the  plant.  (^684//)  The  difference  between  this 
total  and  the  balance  (inventory)  of  the  account  will  show  that  part  of  the  manu- 
facturing expenses  coming  from  other  sources  than  idle  time  which  is  yet  to  be 
distributed. 

725.  Under-estimates  of  manufacturing  expenses  (^721^)  must  be  dis- 
tributed as  a  supplemeniary  charge  over  the  work  in  process  for  the  period,  or  it 
may  be  carried  into  the  next  period,  with  a  corresponding  increase  of  the  charges 
on  the  goods  manufactured  in  that  period;  otherwise,  they  represent  a  dead  loss 
to  the  concern.  Over-estimates,  on  the  other  hand  (^722d),  have  the  advantage 
of  creating  a  reserve,  which  can  be  carried  forward  to  subsequent  periods,  with 
corresponding  reductions  in  the  charges  against  the  goods  then  in  process  of  manu- 
facture.    Either  extreme  should  be  avoided,  if  possible.     (1I684/i,  i} 


230  bookkeeping  and  accountancy 

Manufacturing  Account. 

726.  The  three  preceding  accounts,  viz.,  "materials  in  process,"  "produc- 
tive labor,"  and  "manufacturing  expense"  accounts,  may  be  combined  and  kept 
as  one  account,  under  the  title  of  "manufacturing  account,"  in  which  case  the 
various  elements  of  cost  shown  in  the  separate  accounts  may  be  ascertained  from 
an  analysis  sheet  made  up  from  the  single  account.  The  accounts  are  kept 
separately  to  provide  control  accounts  that  will  give  an  absolute  check  upon 
the  records  kept  of  material,  labor  and  expenses  of  the  factory,  and  to 
guard  against  loss  of  materials  through  neglect  to  charge  them  or  by  theft,  for 
loss  of  labor  time  through  neglect  to  charge  or  caused  by  idleness  of  workmen,  and 
to  quickly  discover  inaccuracies  in  prorating  burden  and  overhead  expenses. 

Rule  for  Debiting  and  Crediting  Manufacturing  Account,  Combining 
Materials  in  Process,  Productive  Labor  and  Manufacturing  Ex- 
penses. 

727.     Debit    'manufacturing"   account, —  728.     Credit   "manufacturing"  account, — ■ 

fl»     For  cost  of  all  materials.     (^711a)  e.     For  cost  of  materials  returned  to  stock- 

h.     For  cost  of  all  direct  labor.  room.     (^7126) 

C*    For  estimated  cost  of  manufacturing  ex-  /.     For  cost  of  materials  in  finished  goods. 

penses  for  the  period.     (l[721a)  (11712c) 

d.    For  cost  of  manufacturing  expenses  dis-  g.     For  cost  of  direct  labor  in  finished  goods, 

tributed    through    the    supplementary  (117176) 

rate.     (1[7216)  h.     For    cost    of   manufacturing  expenses 

charged  to  finished  goods.  (1[722c) 
i.  The  balance  of  this  account  consists  of: 
(a)  the  cost  of  the  materials  in  process 
of  manufacture  (1[713);  (b)  the  cost  of 
direct  laoor  expended  on  uncompleted 
work  in  process  (1[718) ;  and  (c)  the  cost 
of  manufacturing  expenses  charged  or  to 
be  charged  to  work  in  process.   (1[723) 

729.  The  balance  shows  the  cost  of  materials,  productive  labor  and 
manufacturing  expenses  included  in  the  work  in  process  not  completed. 
If  manufacturing  expenses  are  distributed  through  hourly  machine,  productive 
factor,  or  productive  center  time,  the  balance  will  include  the  value  of  unpro- 
ductive machine  hours,  factors,  or  centers.     (11724) 

730.  When  the  estimated  manufacturing  expenses  are  not  charged  to  this 
account  (^727c),  the  balance  of  the  account  will  show  the  amount  of  manufac- 
turing expenses  distributed,  including  the  value  of  idle  machine  time,  although 
the  balance  may  also  contain  inaccuracies  relating  to  the  materials  and  labor,  which 
would  be  revealed  only  through  an  analysis  of  the  account,  which  would  virtually 
separate  it  into  the  three  accounts  indicated. 


THE   COST   METHOD   OP   MANUFACTURING   ACCOUNTS  231 

731.  Shop  cards  and  job  ledger.  Shop  cards  accompany  each  order,  job  or 
contract  during  the  time  the  work  is  in  process,  and  receive  entriea  for  all  items 
of  material,  labor  and  other  direct  charges  that  belong  to  the  work  called  foF  on 
the  cards,  and  also  for  the  charges  covering  burden  and  overhead  expenses  when 
these  costs  are  recorded  concurrently  with  the  charges  for  materials  and  labor. 
On  small  jobs,  these  cards  are  frequently  bound  in  loose-leaf  style  or  indexed  by 
one  of  the  many  card  systems.  Where  there  are  many  items  entering  into  the 
cost  of  the  product  it  is  necessary  to  keep  a  job  ledger,  for  which  the  loose-leaf 
ledger  form  is  usually  preferred.  In  any  event,  the  card  or  ledger  account  finally 
shows  the  total  cost  of  materials,  labor  and  other  direct  charges  entering  into  the 
cost  of  the  finished  product,  and  also  the  cost  of  burden  and  overhead  expenses 
whether  charged  concurrently  with  materials  and  labor  by  the  machine  rate 
method  or  not.  There  are  many  forms  of  ruling  and  arrangement  for  the  cards 
and  stock  ledger  accounts,  the  design  being  determined  by  the  organization  of 
the  shop  processes  and  the  system  of  accounts.  Shop  cards  and  job  ledgers  may 
also  be  used  when  the  department  method  of  conducting  manufacturing  accounts 
is  followed. 

Factory  or  Shop  Expenses. 

732.  These  expenses  are  described  and  the  principal  items  enumerated  in 
^645,  page  201,  It  should  be  noted  that  they  do  not  include  either  material  or 
direct  labor,  which  are  charged  to  their  own  accounts,  but  that  they  do  include 
incidental  labor  and  supplies,  as  well  as  all  other  items  of  factory  expense  which 
enter  into  the  cost  of  production.  (Read  1[657,  1f658)  While  a  single  expense 
account  is  usually  kept  for  factory  expenses,  they  may  be  classified  to  any  extent 
desired  by  opening  separate  accounts  for  each  class  of  items,  or  they  may  be 
classified  on  an  analysis  sheet,  either  monthly  or  at  the  close  of  the  fiscal  period. 

733.  A  sharp  distinction  should  be  made  between  factory  expense  account, 
here  described,  and  manufacturing,  or  factors  expense  account,  described  in  1[719  to 
*!725.  Factory  expense  account  receives  the  charges  for  the  current  expenses  of 
the  factory,  shop  or  works,  and  it  corresponds  in  principle  with  the  general 
expense  account,  described  in  ^310  to  ^324,  while  manufacturing,  or  factors  expense 
account  shows  these  expenses  distributed  over  the  manufactured  product;  conse- 
quently it  will  be  seen  that  the  items  debited  to  factory  expense  account  are 
finally  credits  to  the  masnufacturing,  or  factors  expense  account.  All  items 
credited  to  manufacturing  expense  account  in  the  finished  goods  journal  (T750) 
might  be  credited  directly  to  factory  expense  account,  but  it  would  have  the 
result  of  confusing  such  items  with  credits  in  the  account  from  other  sources,  and 
besides,  it  would  make  factory  expense  account  show  two  results  instead  of  one, 
which  is  always  objectionable  and  in  opposition  to  one  of  the  well-established 
rules  of  accountancy. 


232 


BOOKKEEPING    AND   ACCOUNTANCY 


Rule  for  Debiting  and  Crediteng  Factory  Expenses. 


734.  Debit  "factory  expenses,"  under  ap- 
propriate headings, — 

a.  For  the  cost  of  all  indirect  labor  and  sup- 
plies entering  into  the  cost  of  goods 
manufactured. 

;.  For  the  cost  of  rent,  fuel  and  light,  pow- 
er, taxes,  insurance,  maintenance,  re- 
pairs and  renewals,  depreciation,  and 
such  other  expenses  as  are  incurred  in 
carrying  on  the  work  of  the  shop  or 
factory. 


735.  Credit  "  factory  expenses,"  under  ap- 
propriate headings, — 

c.  For  any  deductions  or  rebates  from 
items  charged  to  this  account. 

d.  For  the  estimated  amount  of  "manu- 
facturing," or  "factors"  expenses  for  a 
given  period,  charged  to  those  accounts 
when  they  are  kept.     (^721a) 

e.  For  expense  items  previously  charged 
to  this  account  transferred  to  other  ac- 
counts. 


736.  The  balance  (or  the  sum  of  the  balances  if  more  than  one  account  is 
opened),  shows  the  over-  or  under-distribution  of  manufacturing,  or  factors  ex- 
penses. (^724,  ^{725)  If  items  in  ^736d  are  not  credited  to  this  account  (read 
•117236),  then  the  balance  of  this  account  should  substantially  equal  the  balance 
shown  by  its  contra  account,  the  manufacturing,  or  factors  expense  account 
(^721,  1|722),  the  difference  between  the  balances  showing  the  over  or  under-dis- 
tribution of  factory  expenses. 

737.  Each  factory  expense  account  in  a  cost  system  is  usually  accompanied 
by  a  complementary  or  contra  account,  which  shows  the  debit  items  of  one  account 
as  the  credit  items  of  the  other,  as  indicated  in  the  preceding  paragraph.  For 
instance,  manufacturing,  or  factors  expense  account  is  the  contra  account  to  fac- 
tory expense  account  and  is,  therefore,  an  offset  account  to  it.  As  has  already  been 
suggested,  the  transfer  entry  between  these  accounts  may  be  omitted,  in  which 
case  the  balances  should  practically  cancel  each  other. 

738.  Prorating  and  distributing  general  and  administrative  expenses. 
Apart  from  and  in  addition  to  factory  expenses,  or  burden,  which  with  the  cost 
of  material  and  labor,  gives  the  total  factory  cost  (see  formula  1[664),  there  are 
usually  certain  other  items  of  expense  incurred  known  as  overhead  expenses. 
(Read  ^654,  ^658)  These  overhead  expenses  must  not  be  confused  with  the 
regular  administrative  and  general  expenses  incurred  in  the  general  or  financial 
management  of  the  concern,  and  which  correspond  in  every  particular  with  those 
of  a  trading  business,  as  set  forth  in  ^[297, 11301, 1f302,  T310,  ^314and  11315;  and  it 
should  be  noted,  also,  that  they  rarely  comprise  more  than  a  small  proportion  of 
the  items  charged  to  the  administrative  and  general  expense  accounts,  and  that  in 
all  instances  Vv^here  it  is  possible,  they  should  be  charged  directly  to  the  factory 
expense  account  and  should  never  appear  in  the  general  or  administrative  expense 
a9counts,  in  which  case,  of  course,  their  consideration  as  separate  items  in  the 
distribution  of  expense  is  unnecessary.     (Read  1[658  to  11663) 


THE    COST   METHOD    OF    MANUFACTURCCG    ACCOUNTS  233 

739.  "When  factory  expenses  are  charged  in  general,  or  administrative 
expense  accounts,  or  when  some  proportion  of  general  or  administrative  expenses 
are  to  be  included  as  part  of  the  cost  of  production  of  goods  manufactured,  their 
amount  should  be  ascertained  and  included  in  the  schedule,  or  inventory,  of 
manufacturing  expenses  for  the  period.  (^720)  When  it  is  desired  to  show 
separately  such  general  or  administrative  expense  items  as  have  been  thus  dis- 
tributed it  is  necessary  to  open  contra  accounts  similar  to  the  contra  account  for 
the  factory  expense  account  or,  preferably,  they  should  be  listed  separately  and 
charged  by  journal  entry  to  the  factory  expense  account  and  credited  to  the  proper 
general  or  administrative  expense  account. 

740.  Manufactured  goods  consist  of  the  articles  which  have  been  completed 
and  delivered  ready  for  sale  to  the  shipping  department  or  for  storage  in  the  ware- 
house. An  account  with  manufactured  goods  is  kept  under  the  title  of  "  Finished 
Goods"  (usually  abbreviated  to  "Fin.  Goods")  or  "Manufactured  Goods." 

Rule  for  Debiting  and   Crediting   Finished   Goods  Account. 

741.     Debit  "finished  goods"  account,—  742.     Credit  "finished  goods"  account,— 

a.     For  the  cost  of  goods  manufactured  dur-  6.     For  the  cost  of  goods  sold  for  the  month 

ing  the  period,  at  cost  of  production,  or  other  period,  per  "cost  of  sales"  rec- 

i.e.,  cost  of  materials,  labor  and  manu-  ord,    stock    delivery   orders,    etc.,   per 

facturing   expense    (burden  and   over-  stock  deliveries  journal.     (1f751) 

head),  as  shown  on  cost  cards  for  each  c.     The   inventory  consists  of   the  finished 

order,  job  or  contract  when  completed,  goods  on  hand,  at  cost, 
per  finished  goods  jouraal.  (11750) 

743.  The  balance  of  the  account  equals  the  total  cost,  or  inventory  value  oj 
the  manufactured  goods  in  stock,  as  shown  by  inventory  or  by  the  stock  ledger, 
when  kept.  This  account,  therefore,  controls  the  finished  goods,  or  stock  ledger. 
The  total  footing  of  the  account  for  the  year  or  other  period,  after  the  inventory 
for  the  previous  period  has  been  deducted,  shows  the  total  cost  of  the  goods  manu- 
factured for  the  period. 

744.  After  the  process  of  manufacture  has  been  completed  and  the  finished 
goods  have  been  charged  to  that  account,  cost  of  production  ends  (11664) 
and  selling,  administrative  and  general  expenses  begin.  It  is,  therefore,  at  this 
point  that  the  manufacturing  statement  ends  and  the  trading  statement  begins. 
The  conneo-tion  between  the  manufacturing  accounts  and  the  trading  accounts 
is  through  the  entry  debiting  cost  of  sales  account  for  the  cost  of  the  goods 
sold  and  crediting  finished  goods  account,  mentioned  in  1^7425 


234  BOOKKEEPING   AND   ACCOUNTANCY 

745.  "Cost  of  goods  sold,"  or '  'cost  of  sales' '  account  is  debited  for  the  cost  of  the 
manufactured  goods  sold.  It  is  an  offset,  or  contra  account,  to  the  sales  account, 
the  difference  between  them  showing  the  trading  profit  for  the  period.  The  debit 
to  this  account  is  invariably  the  credit  to  finished  goods  account,  as  previously 
stated.  Its  only  purpose  is  to  eliminate  the  cost  of  goods  sold  from  the  sales 
account,  so  that  its  debit  footing  will  show  only  those  items  called  for  in  ^159a,  b,c. 
Various  methods  for  recording  costs  of  goods  sold  are  employed.  One  is  to  enter 
both  cost  and  selling  price  on  orders,  from  which  the  cost  price  is  tabulated  for 
the  period;  another  is  to  enter  the  cost  price  of  each  article  sold  in  the  sales  book, 
or  on  sales  ticket,  their  sum  being  the  total  cost  of  the  goods  sold  for  the  period  ; 
the  third  is  to  make  up  a  similar  record  from  stock  delivery  orders.  An  entry  for 
the  month  or  period,  debiting  sales  account  and  crediting  finished  goods  account, 
is  required.  The  sales  account  of  a  manufacturing  concern  is  in  every  respect 
similar  to  the  sales  account  of  a  trading  business,  described  in  1[156  to  ^169  of  this 
text.  To  eliminate  an  extra  account,  sales  account  may  be  debited  for  the  cost 
of  goods  sold,  instead  of  "cost  of  goods  sold"  account  as  stated.  The  difference 
between  the  two  sides  of  the  sales  account  would  then  show  the  gross  trading 
profit  for  the  period. 

746.  The  various  manufacturing  accounts,  as  has  already  been  stated  under 
the  several  accounts,  are  connected  with  each  other  and  with  the  factory  cost 
accounts  kept  in  subordinate  ledgers  and  other  account  books  of  the  factory, 
shop  or  works,  which  they  control,  through  a  series  of  entry  books,  variously 
designated  as  journals,  or  books,  the  name  "journal,"  seeming  to  have  the  prefer- 
ence among  accountants.     These  journals  are  as  follows: 

747.  Invoice,  or  purchases  joiiraal.  This  book  receives  the  entries  for  all 
materials  purchased,  whether  raw  or  partly  manufactured,  which  enter  directly 
into  the  manufactured  product,  including  freight  and  drayage  and  all  other  charges 
necessary  to  place  the  material  in  the  stock-room  ready  for  use.  (^705a)  The 
entries  are  made  from  the  invoices,  and  the  freight,  drayage,  and  other  bills 
received.  The  total  footing  is  debited  to  materials  account  and  credited  to 
accounts  payable  in  the  general  ledger,  the  various  items  being  debited  in  the  mate- 
rials, stock,  or  stores  ledger,  as  described  in  1[708.  When  the  voucher  system 
for  recording  purchase  accounts  is  used,  the  debit  to  materials  account  is  made 
from  the  vouchers  payable  register,  which,  of  course,  eliminates  a  separate 
purchases  ledger  which  would  otherwise  be  kept. 


THE    COST   METHOD    OF   MANUFACTURING    ACCOUNTS  235 

748.  Transfer  outward  or  requisition  journal.  All  materials  taken  from 
stock  on  requisition,  for  work  in  process,  are  entered  in  this  book  from  the  requi- 
sition blanks,  at  cost.  The  total  footing  for  the  month  is  debited  to  materials  in 
process  account  (^7 11a)  and  credited  to  materials  account  ("([TOBc),  while  the 
items  are  credited  to  the  proper  accounts  in  the  material,  stock,  or  stores  ledger. 
(^(708)  When  a  single  manufacturing  account  is  kept  (^726),  the  total  footing 
is  debited  to  that  account.     (^727a) 

749.  Transfer  inward  journal.  In  this  book  is  recorded  from  "stock 
returned"  cards,  all  entries  for  materials  returned  to  the  stock,  or  stores  room, 
at  cost  price,  which  were  previously  credited  to  materials  account.  The  total 
footing  for  the  month  is  debited  to  the  materials  account  in  the  general  ledger 
(^7056)  and  credited  to  materials  in  process  account.  (1[7126)  The  separate 
items  are  debited  to  the  proper  accounts  in  the  materials,  stock,  or  stores  ledger, 
at  cost  price.     (1[708) 

750.  Finished  goods  journal.  When  each  order,  job  or  contract  Is  com- 
pleted and  the  finished  goods  are  ready  for  sale  or  have  been  placed  in  warehouse, 
an  entry  is  made  in  this  book  from  the  factory  cost  cards,  or  job  ledger,  on  which 
have  been  entered  and  totaled  the  separate  costs  of  material,  direct  labor,  and  man- 
ufacturing expenses.  This  journal  should,  therefore,  contain  columns  to  receive 
these  items.  At  the  end  of  the  month,  the  footing  of  the  total  column  is  posted 
to  the  debit  of  finished  goods  account  (^741a),  while  the  footings  of  the  credit 
columns  are  posted  to  the  credit  of  materials  in  process  account  (^7 12c),  labor 
account  (^7176),  and  manufacturing,  or  factors  expense  account  (^722c)  When 
a  single  manufacturing  account,  combining  these  credit  accounts,  is  kept,  they 
are  credited  to  that  account.     (^728/,  h,  g) 

751.  Stock  deliveries  journal.  When  this  book  is  kept,  it  is  necessary  to 
enter  only  the  numbers  of  the  stock  delivery  orders  Oi*  sales  tickets,  and  the  total 
cost  of  production  price  of  each  aiticle,  which  may  be  taken  from  the  original 
cost  cards  for  the  article  or  from  the  j  ob  ledger.  The  total  for  the  month  is  posted 
to  the  debit  of  cost  of  sales  account  or  to  the  debit  of  sales  account,  when  that 
account  is  not  kept.     (11745)     It  is  credited  to  finished  goods  account.     (1|7426) 

752.  Manufacturing  expense  estimate  book.  In  this  book  is  entered,  at  the 
beginning  of  each  period,  the  estimated  cost  of  each  factory  expense  for  the  period 
covered  in  the  estimate,  which  may  be  for  the  fiscal  year  or  for  a  quarter  or  month. 
(1[720)  The  cost  of  these  expenses  is  based  largely  upon  the  actual  expenses  of 
previous  similar  periods,  with  such  changes  as  may  be  necessary.  The  total  of 
these  factory  expenses  equals  the  total  manufacturing  expense  which  is  to  be 
distributed  over  the  work  of  the  period  then  beginning,  by  one  or  the  other  of  the 


236  BOOKKEEPING   AND    ACCOUNTANCY 

methods  employed.  (^678,  11679)  It  should  be  divided  into  monthly  amounts 
which  should  be  debited  to  manufacturing,  or  factors  expense  account  (11721a) 
and  credited  to  factory  expense  account.  (1l735rf)  If  no  entry  is  made  of  the 
estimated  monthly  manufacturing  expenses,  as  suggested  in  1|723(Z,  1[736,  it  should 
be  carefully  compared  monthly  with  the  balance  shown  by  the  manufacturing, 
or  factors  expense  account,  as  well  as  with  the  balance  shown  by  the  factory 
expense  account.  Varying  conditions  shown  by  idle  productive  factors  caused 
by  decreased  production,  labor  troubles,  overtime,  and  the  various  other  elements 
affecting  manufacturing  costs,  will  usually  require  frequent  changes  to  be  made 
in  the  monthly  estimate  of  manufacturing  expenses  (burden  and  overhead). 
This  book,  therefore,  is  of  great  importance  in  the  efficient  and  economical  adminis- 
tration of  a  manufacturing  business. 

Series  of  Entries  Illustrating  the  Routine  for  Debiting  and  Crediting 
Accounts  Under  the  Cost  Method,  From  the  Time  Materials  are 
Purchased  Until  the  Finished  Product  is  Sold. 

753.     Each  step  in  the  usual  course  of  procedure  in  manufacturing  is  indi- 
cated in  the  following  entries : 

a.     When  materials  are  purchased  to  be  used  up  in  the  manufacture  of  goods,  the  f  ollowinj; 
accounts  are  debited  and  credited  in  the  invoice,  or  purchases  journal  (11747) : 
"Materials,"  Dr.   (11705a)  Forcostof allmaterials,includingtrans- 

"Accounts  Payable,"  Cr.  portation  and  other  charges  necessary 

to  place  the  materials  in  the  stock-room 
ready  for  use. 

6.    When  materials  are  taken  from  the  stock-room  on  requisition,  for  use  in  the  work-shop, 
the  following  accounts  are  debited  and  credited  in  the  transfer  outward  journal  (11748) : 
"Materials  in  Process,"  Dr.   (11711a)  For  the  cost  price  of  all  materials  re- 

"Materials"  Cr.   (11706c)  ceived  from  the  stock-room. 

c.  When  unused  materials  are  returned  to  the  stock-room,  the  following  accounts  are 
debited  and  credited  in  the  transfer  inward  journal  (11749) : 

"Materials,"  Dr.   (117056)  For  unused  material  returned  to  the 

"Materials  in  Process,"  Cr.   (117126)  stockroom,  at  cost  price. 

d.  When  the  daily,  weekly  or  monthly  pay-roll  is  made  up,  the  accounts  debited  and  cred- 
ited from  the  pay-roll,  time  book  or  a  list  of  the  time  cards,  are  as  follows : 

"Labor,"  Dr.   (1i716a)  For  direct  labor. 

"Factory  Expense,"  Dr.   (11734a)  For  indirect  labor. 

"Cash,"  Cr.  (or)  When  paid  in  cash. 

"Vouchers  Payable,"  Cr.  (or)  When  the  voucher  system  is  used  and 

voucher  is  issued  for  pay-roll. 
"Pay-Roll"  Cr.  When  such  an  account  is  kept  for  pur- 

pose described  in  11563. 

Note.— The  proper  account  to  be  credited  in  connection  with   the  pay-roll   depends 
upon  the  system  of  accounts  followed. 


THE    COST   METHOD    OF   MANUFACTURING   ACCOUNTS  237 

e.  When  orders,  jobs  or  contracts  are  completed  and  the  finished  goods  are  ready  for 
Bale  or  have  been  placed  in  warehouse,  and  ^e  burden  and  overhead  expenses  have  been  pro- 
rated and  distributed  on  factory  co'st  cards  or  job  ledger,  and  the  total  cost  of  production,  or 
"cost  to  make,"  has  been  determined,  the  following  accounts  are  debited  and  credited  in  the 
finished  goods  journal  (1f750): 

"Finished  Goods,"  Dr.     (11741a)  For  the  cost  of  materials,  direct  labor, 

"Materials  in  Process,"  Cr.     (1[712c)  and  of  burden  and  overhead  charges  en- 

"  Labor,"  Cr.     (117176)  tering  into  the  total  cost  of  production. 

"Manufacturing,"     or     "Factors    Ex- 
pense"   Cr.      (11722c) 

/.  When  manufactured  goods  are  sold,  the  following  accounts  are  debited  and  credited: 
"Accounts  Receivable,"  Dr.  For  the  selling  price  of  the  goods  sold. 

"Sales,"  Cr. 

g.    When  the  cost  of  the  goods  sold  is  determined  at  the  end  of  the  month,  the  following 
accounts  are  debited  and  credited  in  the  stock  deliveries  journal  (1[751): 
"Cost  of  Sales,"   Dr.      (11745)  For  the  cost  of  the  goods  sold. 

"Finished  Goods,"  Cr.     (117426) 

h.  When  a  "cost  of  sales"  account  is  not  kept,  sales  account  is  debited  in  the  foregoing 
transaction  instead  of  "cost  of  sales"  account.     (1[745) 

753a  In  addition  to  the  routine  entries  outlined  in  the  preceding  paragraphs,  there  are  a 
number  of  other  entries  which  may  be  made  necessary  when  there  is  a  departure  from  the  usual 
routine  in  the  manufacturing  processes;  for  instance,  it  is  not  unusual  in  manufacturing  estab- 
lishme-nts,  during  dull  seasons  or  when  work  is  slack  in  any  department,  to  partly  manufacture 
or  complete  stock  parts  or  materials  ahead  of  the  time  when  they  are  required  for  the  comple- 
tion of  articles,  by  doing  such  machine  or  other  work  upon  them  as  opportunity  will  permit. 
When  this  is  done,  an  order  is  prepared,  the  materials  are  requisitioned,  at  cost  price;,  from  the 
stock-room,  and  the  manufacturing  process,  whatever  it  may  be,  proceeds  Cjxactly  as  though 
they  were  to  be  at  once  completed,  the  productive  labor  and  burden  being  charged  as  usual. 
When  the  work  is  carried  as  far  as  possible  or  until  it  is  found  necessary  to  discontinue  it,  the 
cost  cards  are  made  up  for  whatever  work  has  been  accomplished,  and  the  new  cost  price  deter- 
mined, when  the  materials  or  parts  are  returned  to  the  stock-room.  When  this  is  done,  the  entry 
shown  in  H  753e  would  be  made,  at  the  new  cost  price,  except  that  materials  account  would 
be  debited  instead  of  finished  goods  account,  and  the  entry,  of  course,  would  be  made  in  the 
general  journal  instead  of  in  the  finished  goods  journal. 

(6)  Another  instance  is  where  finished  parts  or  materials  in  the  stock-room  are  sold  as 
in  the  case  of  automobile  or  other  machine  parts.  While  the  article  would  be  credited  to  sales 
account  at  selling  price,  it  must  be  credited  to  materials  account  at  cost  price,  which  would 
require  a  general  journal  entry,  debiting  cost  of  goods  sold  account  and  crediting  materials 
account  to  adjust. 

(c)  A  third  illustration  is  where  finished  parts  or  articles  that  have  been  charged  to  fin- 
ished goods  account  and  placed  in  the  sales-room  or  warehouse,  are  returned  to  the  work -shop 
to  be  used  for  the  completion  of  some  other  article;  for  instance,  where  finished  valves,  oil 
cups  or  the  like  are  used  in  the  completion  of  an  engine  in  process  of  building.  In  such  case^, 
materials  in  process  should  be  debited  and  finished  goods  credited,  at  the  total  factory  cost 
of  the  article,  through  the  general  journal  or  through  a  special  journ:.]  kept  for  that  purpose. 
Other  transfers  of  materials  or  products  in  various  stages  of  manufacture,  outside  of  the  usual 
routine,  may  require  corresponding  entries,  which  may  be  easily  determined  by  a  consideration 
of  the  accounts  involved. 


238  BOOKKEEPING   AND   ACCOUNTANCY 

754.  Inventories  of  manufacturing  accounts.  Separate  inventortes  are 
required  of  materials,  (^706e)  materials,  in  process,  (1[712c)  labor,  (^717c)  manu- 
facturing expenses,  (^722e)  factory  expenses,  (^735/)  and  finished  goods, 
(1[742c)  prior  to  the  preparation  of  the  manufacturing  statement.  These  inven- 
tories are  invariably  taken  at  cost  price. 

a.  The  materials  inventory  consists  of  a  list  of  the  materials  on  hand  in  the  stock,  or  stores 
room,  taken  at  cost  price,  which  must  agree  with  the  accounts  in  the  stock,  or  stores  ledger  or 
on  cards.  Where  purchases  of  the  same  article  are  made  at  different  prices,  the  average  price 
must  be  ascertained  or  separate  accounts  for  different  prices  may  be  opened. 

h.  The  materials  in  process  inventory  is  made  up  from  the  cost  cards  or  from  the  job  ledger 
for  each  of  the  orders,  jobs  or  contracts  which  are  uncompleted.  Where  the  materials  were 
purchased  at  different  times  at  different  prices,  the  average  price  for  the  materials  in  each  order, 
job  or  contract  must  be  ascertained,  or  separate  accounts  may  be  kept  with  the  same  items 
at  different  prices. 

c.  The  labor  inventory  consists  of  the  direct  labor  on  uncompleted  orders,  jobs  or  con- 
tracts, made  up  from  the  cost  cards  or  job  ledger. 

d.  The  manufacturing  expense  inventory  consists  of  all  manufacturing  expenses  yet  to  be 
charged  to  work  in  process.  When  manufacturing  expenses  are  distributed  on  a  percentage 
basis,  this  inventory  is  found  by  calculating  the  manufacturing  expenses  that  have  accrued 
on  the  uncompleted  work  in  process.  (Read  1[723 ;  then  read  ^724) .  If  manufacturing  expenses 
are  distributed  through  machine,  productive  factor  or  productive  center  time,  the  inven- 
tory would  include  any  productive  hours  that  have  not  been  charged  on  the  cost  cards  or  i  n  the 
job  ledger,  and  any  idle  machine  hours  if  idle  time  has  not  been  included  in  the  supplementary 
rate.  A  separate  record  should  be  kept  of  idle  machine  hours,  which,  taken  in  connection  with 
the  results  shown  by  the  manufacturing  account,  would  give  a  complete  analysis  of  manufac- 
turing expenses  and  shop,  or  works,  efficiency. 

e.  Factory  expense  inventory  is  similar  to  the  ordinary  expense  inventory.  (1[464-474c) 
These  inventories,  like  the  other  manufacturing  account  inventories  should  be  treated  as 
directed  in  rule  172. 

/.  Finished  goods  inventory  is  in  every  way  similar  to  merchandise  inventory,  described 
in  If  169,  except  that  it  is  always  taken  at  cost  price,  whereas,  if  there  has  been  any  depreciation 
or  change  in  value,  it  should  be  disposed  of  as  instructed  in  1[169a. 


MANUFACTURING   STATEMENTS  239 

MANUFACTURING  STATEMENTS. 

755.  Four  principal  statements  are  usually  prepared  at  the  close  of  each 
fiscal  period  from  the  books  of  a  manufacturing  business:  the  manufacturing 
statement,  to  show  the  cost  of  production  of  goods  manufactured  during  the  year 
or  other  fiscal  period;  the  trading  statement,  to  show  the  gross  trading  profit  or 
the  gross  trading  loss  from  sales  for  the  period  (^234);  the  profit  and  loss  state- 
ment, to  show  the  net  profit  or  the  net  loss  for  the  period  and  its  disposition  at 
the  close  of  the  period  (1[437);  and  the  statement  of  resources  and  liabilities,  or 
balance  sheet,  for  the  period  (^487).  The  first  of  these  statements  is  peculiar 
to  the  manufacturing  business;  the  last  three  are  in  every  way  similar  to  those 
of  a  trading  business,  which  are  fully  explained  in  previous  chapters. 

756.  The  form  of  the  manufacturing  statement  is  determined,  to  some 
extent,  by  the  classification  of  the  accounts  in  the  general  ledger,  which  is  also 
true  of  the  results  shown  in  the  final  trial  balance  from  which  the  statement  is 
prepared.  When  the  department  method  of  accounts  is  followed,  the  final  trial 
balance  supplies  most  of  the  data  for  a  very  comprehensive  proof  statement  show- 
ing the  disposition  of  the  various  cost  elements  in  the  manufacturing  processes. 
When  the  cost  method  of  accounts  is  followed,  the  trial  balance  and  the  accom- 
panying statement  are  usually  much  briefer,  as  the  various  cost  elements  are  fully 
accounted  for,  proven  and  disposed  of  in  the  current  control  accounts,  although 
the  manufacturing  statement  may  be  made  as  complete  as  desired  by  going  to 
the  ledger  accounts  for  supplementary  information. 

756a.  The  difference  in  results  shown  in  the  trial  balances  of  two  groups  of 
manufacturing  accounts,  both  made  up  from  the  same  series  of  transactions,  one 
group  kept  by  the  department  method  and  the  other  group  by  the  cost  method,  is 
strikingly  illustrated  in  the  trial  balances  shown  in  illustrations  103  and  108, 
and  the  manufacturing  statements  made  up  from  each.  These  differences  are 
noted  in  the  explanatiojns  showing  the  reconciliation  between  them. 

757.  To  show  cost  elements  and  their  disposition  in  detail,  manufacturing 
statements  should  be  prepared  in  two  parts,  the  first  part  to  show  the  prime  cost 
of  the  goods  manufactured  or  partly  m'-inufactured  for  the  period,  the  second 
part  to  show  the  factory  cost,  or  cost  of  production,  of  the  goods  manufactured  for 
the  period,  corresponding  with  the  first  two  items  in  the  cost  formula,  ^664. 
Part  1  is  made  up  from  those  accounts  which  show  cost  of  materials  and  of  direct 
labor,  and  of  any  other  items  that  enter  into  the  prime  cost  of  the  goods  manufac- 
tured or  partly  manufactured.  Part  2  is  made  up  from  those  accounts  which 
show  the  cost  of  the  manufacturing  expenses  (burden  and  overhead),  and  of  any 
other  items  which,  added  to  prime  cost,  snter  into  the  total  cost  of  prodimtion 
of  the  goods  manufactured. 


240 


BOOKKEEPING   AND   ACCOUNTANCT 


FORMULA  FOR  MANUFACTURING  STATEMENT 

Part  1,  showing  prime  cost. 


75S.     Elements  of  cost  for  period  consist  of: 

a.  Cost  of  materials  on  hand  at  the  begin- 
ning of  period,  as  shown  by  inventory 
or  by  balance  of  materials  account. 
(H  707) 

b.  Cost  of  partly  manufactured  goods  on 
hand  at  the  beginning  of  period,  includ- 
ing cost  of  materials  and  direct  labor 
(prime  cost),  as  shown  by  inventories; 
or,  when  the  cost  method  of  accounts  is 
followed,  by  balances  of  "materials  in 
process"  and  "productive  labor"  ac- 
counts for  the  previous  period.  (1[  713, 
718) 

c.  Cost  of  purchases  for  the  period,  less 
returns  and  allowances,  as  sho\vn  by 
the  material  accounts  when  kept  under 
either  the  department  or  cost  method. 
(11705a) 

d.  Cost  of  productive  labor  (direct  labor) 
for  the  period,  as  shown  by  the  labor 
account.     (U'716a) 


759.     Disposition  of  costs  shown  in: 

e.  Cost  of  goods  manufactured  during 
period,  including  cost  of  material  and 
direct  labor  (prime  cost),  as  shown  by 
the  material  and  labor  accounts;  or, 
when  the  cost  method  of  accounts  is 
followed,  as  shown  by  credits  to  the 
"materials  in  process"  (If  712c)  and 
"productive  labor"  (1[  7176)  accounts, 
the  contra  of  which  is  charged  to  fin 
ished  goods  account. 

/.  Cost  of  partly  manufactured  goods  on 
hand  at  the  close  of  the  period,  valued  at 
prime  cost,  as  shown  by  unfinished 
orders,  jobs  or  contracts;  or,  when  the 
cost  method  of  accounts  is  followed,  by 
the  sum  of  the  balances  of  "materials 
in  process"  (1[  713)  and  "productive 
labor"  accounts  (prime  cost).      {^  718) 

g.  Cost  of  materials  on  hand  at  the  close 
of  the  period,  shown  by  the  inventory; 
or,  when  the  cost  method  of  accounts 
is  followed,  by  the  balance  of  the  mate- 
rials account.     (1[  707) 


Part  2,  Bhov/ing  cost  of  production. 


760.     Elements  of  cost  consist  of: 

h.  Cost  of  manufacturing  expenses  at 
beginning  of  period,  as  shown  by  inven- 
tory; or,  when  the  cost  method  of  ac- 
counts is  followed,  by  the  balance  of 
manufacturing  expense  account  at  the 
beginning  of  period.     (1f723) 

i.  Cost  of  goods  manufactured  during 
the  period,  as  described  in  item  "e  ' 
above  (prime  cost). 

J.  Cost  of  manufacturing  expenses  for 
the  period,  as  shown  by  the  manufac- 
turing expense  account  or  accounts 
for  the  period.     (^  721o,  6) 


761.     Disposition  of  costs  shown  in: 

k.  Cost  of  manufacturing  expenses  on 
partly  manufactured  goods,  at  the  close 
of  the  period,  as  shown  by  the  balance 
of  manufacturing  expense  account  or 
accounts.     (If  723) 

I.  Cost  of  goods  manufactured  during  the 
period,  at  total  cost  of  production,  as 
shown  by  finished  cost  sheets  or  orders; 
or,  when  the  cost  method  of  accounts 
is  followed,  by  the  amoiuit  charged 
to  finished  goods  account  for  the  period. 
(H  741a) 


MANUFACTURING    STATEMENTS 


241 


762.  The  elements  of  cost  included  in  a  complete  manufacturing  statement 
for  a  given  period  may  be  cleariy  understood  from  the  formula  opposite,  in  which 
the  items  are  shown  in  the  position  and  order  in  which  they  should  appear  in 
the  statement.  It  will  be  observed  that  a  statement  prepared  after  this  formula 
will  show  not  only  the  various  elements  of  cost  entering  into  the  total  cost  of 
production,  but  also  a  proof  of  the  correct  distribution  of  these  costs  by  account- 
ing for  them  in  the  completed  and  partly  manufactured  goods  for  the  period,  and 
in  the  proven  balances  shown  by  the  control  accounts. 

763.  A  final  trial  balance,  taken  from  a  set  of  books  in  which  the  manu- 
facturing accounts  are  kept  by  the  department  method  (^687),  is  shown  in  illus- 
tration 103.  The  manufacturing  accounts  are  indicated  by  the  letter  "M" 
in  the  margin. 


Illustration  103 


TRIAL  BAT.ANCS,  IEC3EMBER  31,   19 


TOED  IIFS.   CO. 


Cash  -  par  C.  B. 

10200 

00 

3^/X^ 

Cash  -  petty 

200 

00 

u 

Materials  and  supplies 

3600 

00 

u 

Uatorial  in  procosa 

2700 

00 

M 

Labor  in  process 

>  Inventories,  Jan.  1,  19 

1400 

00 

U 

Manufacturing  ejcpenses 
Finished  goods 

650 
7000 

00 

00 

Accovmts  Receivable 

17500 

00 

Machinery 

29000 

00 

Small  Tools 

1800 

00 

Office  furniture  and  fixtures 

500 

00 

Store  Fixtures 

500 

00 

Accrued  Taxes 

100 

00 

Accrued  Pay-roll 

1200 

00 

Accounts  Payable 

6000 

00 

Smrplus 

8200 

00 

Reserve  for  Uncollectable  Acooiints 

350 

00 

Reserve  for  Depreciation  on  Uachinery,  etc. 

1500 

00 

Capital  Stock  -  Preferred   250  shares  at  $100 

25000 

00 

Capital  Stock  -  Comnon     250     " 

25000 

00 

U 

Materials  Purchased 

53000 

00 

M 

Labor 

34000 

00 

Sales,  less  returns,  allowances  &   discounts 

116200 

00 

U 

Manufacturing  Expenses 

12000 

00 

Selling  Expenses 

5000 

00 

Administrative  Expenses 

4100 

00 

183550 

00 

183550 

00 

764.  Inventories.  The  inventories  at  the  close  of  the  period,  December  31, 
are  as  follows:  materials  and  supplies,  $8500;  materials  in  process,  $4200; 
labor  in  process,  $1750;  manufacturing  expenses,  $1480;  finished  goods,  $9420, 


242 

Illustration  104 


Th^J. 


BOOKKEEPING  AND  A(?COUNTANCY 

MAiriTFACTOTIKG  SOlATEJElCr  FOP.  YEAR  BKDIKG  IEC51IBER  31,   19 


Prlmo  Cost. 


c-y 


yoy 


IWENTOHIES,   Jan.    1,   19     , 

Uatorials  and  supplies  at  cost 

c     Matsrials  in  process  -  partly  mfg'd  goods 

I      Labor  in  process  -  " 

PDBCHASES  OF  MATERIALS  and  other  manufacturine  8\q>plioa 
during  period,  including  inward  freight  and  oxpress- 
age.  less  returns,  allowances,  discounts,  etc. 

PRODUCTIVE  LABOR  for  period 


Production  Cost. 

'MANUFACTURIHG  EXPENSES  of  preceding  period  applloahlo 

to  partly  manufactured  goods 
PRIME  COST  of  goods  namifactured  during  period,  brought 
MAKUPACTURINO  EXPENSES  during  period:  - 

Rent  of  factory 

Taxes  of  factory 

Stationery  and  supplies 

Insurance  on  materials  sind  machinery 

Superintendence 

Wages  of  forenan  and  factory  clerics 

Wages  of  firemen,  engineers  and  oilers 

Fuel  and  lighting 

Rei^airs  and  renewals  on  machinery 

Depreciation  on  machinery 


dam 


2700 
1400 


2200 

200 

100 

500 

1500 

2400 

2500 

500 

600 

1500 


3800 
4100 


53000 
34000 


94900 


850 
80450 


12000 


93300 


765.  Manufacturing  statement — department  method   of    accounts.     The 

statement  in  illustration  104  is  made  up  from  the  trial  balance,  illustration  103, 
and  the  inventories  at  the  close  of  the  period.  The  American,  or  standard  form 
of  statement  is  shown  in  the  illustration.  The  items  in  detail,  entering  into  the 
total  manufacturing  expenses  as  shown  on  the  statement,  were  found  by  an  analy- 
sis of  the  manufacturing  expense  account.  The  same  is  true  of  the  items  making 
up  the  total  selling  expenses  and  the  total  administrative  expenses  shown  in 
illustrations  105  and  106. 

766.  Preparation  of  the  manufacturing  statement  when  manufacturing 
accounts  are  kept  by  the  department  method.  Explanation:  Notice  that  Part 
1  of  the  statement  shows  'prime  cost,  and  that  Part  2  shows  cost  of  production, 
in  agreement  with  the  formula  for  manufacturing  statement.     (11664) 

Part  1. 

(1)  Inveritories,  January  1,  19  ,  consisting  of  three  items,  are,  inventories 
at  the  close  of  the  last  preceding  fiscal  period,  taken  from  the  trial  balance.     (H  174) 

(2)  Purchases  of  materials  are  shown  by  the  debit  balance  of  materials 
account  in  the  trial  balance. 

(3)  Productive  labor  is  shown  by  the  debit  balance  of  the  labor  account  in 
the  trial  balance. 


MANUFACTURING   STATEMENTS 

TOB  TQIiD  MMFACTimiiro  CO..   PITTSBUBG.   PA. 


243 


■jCa 


2.2- 


PBIME  COST   (natorials  and  labor)   of  eoods  manufacturod 

during  period,  carried  down         . 
lOTEKTOEIES,  Dec.    31,  19     , 

Materials  and  supplies,  at  cost 

Materials  in  process  -  partly  mfg'd  goods 

Labor  in  proooss 


MAmrFACTURIira  EHCTSES  applicable  to  partly  manufactured 
goods  .H  , 

PKODUCTIOH  COST  of  goods  manufaoturod  dxiring  period,  camp 
to  trading  statement 


4200 
1750 


80450 
8500 
5950 


94900 


1480 
91820 


93300 


(4)  Frime  cost  is  the  difference  between  the  debit  items  showing  cost  of 
material  and  productive  labor,  and  the  credit  items  showing  the  inventories 
at  the  close  of  the  period,  i.e.,  it  represents  the  cost  of  the  material  and  labor 
entering  into  the  goods  manufactured  during  the  period. 

(5)  Inventories,  December  31,  19  ,  consisting  of  three  items,  are  the  inven- 
tories at  the  close  of  the  present  fiscal  period.  (1[174)  Af ':er  this  item  is  entered, 
Part  1  of  the  statement  should  be  footed  and  ruled,  as  shown  in  the  illustration. 

Part  2. 

(6)  Manufacturing  expenses  during  preceding  period,  the  first  item  on  the 
debit  side  of  Part  2,  is  the  inventory  of  manufacturing  expense  accou;nt  at  the 
close  of  the  last  preceding  fiscal  period,  as  shown  in  the  trial  balance. 

(7)  Prime  cost  is  the  first  item  on  the  credit  side  of  Part  1  brought  down. 

(8)  Manufacturing  expenses  for  the  period  are  found  in  the  debit  balance 
of  manufacturing  expense  account  in  the  trial  balance,  th,e  various  items  being 
found  by  an  analysis  of  that  account. 

(9)  Manufacturing  expenses,  the  first  item  on  the  credit  side,  is  the  amount 
of  the  inventory  of  these  expenses  at  the  close  of  the  present  fiscal  period. 

(10)  The  production  cost  of  the  goods  manufactured  during  the  period  is 
the  difference  between  the  sum  of  the  debit  and  the  credit  items,  which  completes 
Part  2  of  the  statement.  The  production  cost,  represented  in  the  last  credit 
item,  is  the  connecting  link  between  the  manufacturing  and  the  trading  statement, 
that  item  being  shown  as  the  second  item  on  the  debit  side  of  the  trading  state- 
ment. 


244 


BOOKKEEPING  AND    ACCOUNTANCY 


IlXUSTBATION   106 


TRADIKG  STATJSffiirr  POR  YEAS  EKDIKG  DECKT.TFSER  31,   19 


IHVEUTORY,   Deo.    31,   19      , 

Uanufaotured  goods  on  hand  at  closo  of 

preceding  period 
GOODS  I'JIITUFACTURED  during  period,  per  nanufacturing' 

statement 
Total  cost  of  manufacttired  product 
Le93  INVEirrORY  manufactured  goods  on  hand,  at  close 

of  this  period,   Dec.   31,  19     , 
Cost  of  goods  sold 
Gross  trading  profit  carried  down 


SELLIHG  AlH)  DISTRIBUTING  EXESUSES, 

Freight  outward 

Cooaisslon  for  selling 

Salesmen's  salaries 

Wages  of  shippers  and  pacltora 

Insurance  on  stock,  etc. 

Traveling  expenses 

Supplies 

Advertising 

Heat  and  light 

Rent  show-room 

Storage,  -  outside  warehouse 

Depreciation  on  fixtures 
lET  TRADING  PROFIT  carried  to  profit  and  loss  statement 


100 

20C 

2500 

600 

5C 
1230 

50 
100 

10 
100 

50 

10 


7000 
91820 


98820 

9420 


69400 
26800 


116200 


5000 


21800 


26800 


767.  Trading  statement.  This  statement  is  similar  in  all  essential  partic- 
ulars to  the  trading  statement  of  a  mercantile  business.  (^240)  It  is  shown 
in  illustration  105.  The  statement  of  resources  and  liabilities  is  shown  in  illus- 
tration 107. 


Illustration  108 


PROFIT  ATO  L063  STATEMENT  FOR  YEAR  EUDING  DECEUBSR  31,   19 


ABIIUI STRATI VE  EXPENSES 

Rent  of  offices 

Insurance  on  furniture  4  fixtuxoa 

Taxes  -  proportion 

Interest  on  loans 

Officers'  salaries 

Clerks*  salaries 

Audit  fee 

Stationery  and  office  supplies 

Heat  and  light 

Repairs,  office  furniture 

Reserve  for  doubtful  accounts 

Depreciation  on  furniture 
NET  PROFIT  for  period,  carried  down 


DIVIDEND  Preferred  stock,  $25000,  at  1% 

Conmon  stock,  $25000,  at  10% 
SURPLUS  PROFITS  carried  down 


Surplus,  Dec.  31,  19  ,  as  shown  on  balance  sbsat 


100 

18 

50 

30 

2000 

1000 

200 
50 

100 
60 

400 
92 


1750 
2600 


4100 
17700 


21800 


4250 
13450 


17750 


21650 
£1650 


MANUFACTURING   STATEMENTS 

TlIE  TODD  UAHDFACTUBIHG  CO. ,    PITTSEUBG,   PA. 


245 


Sales  -  less  retuma,  allowances  and  dlsoounta 


Gross  trading  profit  bi-o't  down 


11620C 


116200 


26800 


26600 


768.  Profit  and  loss  statement.  This  statement,  shown  in  illustration 
106,  while  similar  to  the  profit  and  loss  statement  explained  in  ^[435-445  is 
divided  into  three  parts,  the  first  showing  the  net  profit  for  the  period,  the  second 
showing  the  distribution  of  the  net  profits  for  the  period,  and  the  third  showing 
the  undivided  profits,  or  surplus,  of  the  business  at  the  close  of  the  period. 

THE  TODD  ILMOTACTTOIHG  CO.,  PITTSBDBG,   PA. 


HET  TRADINO  PROFIT  from  trading  statement 


UET  PBOPIT  bro't  down 


SUBPLU3  PROFIT,   sxirpl'as  a/o,  Jan.    1,  19 
SURPLUS  profit  for  period,  bro't  doTOi 


21600 


21800 


17700 


17750 


8200 
15450 
21650 


246 

Illustration  107 


BOOKKEEPING   AND    ACCOUNTANCY 


ST4TE:XEET  of  KESOOBCES  Aim  liabilities,   lECBaiBEE  31,   19 


Cash  in  offlco 
Cash  In  banic 
Inventories,  - 

Materials  in  stock 

Materials  in  process 

Labor  on  materials  in  process 

Manufacturing  expenses 

Finished  eoods  in  stock 
Accounts  receivable 

Less  reserve  for  uncollectablo  aocpunts 
Total  current  resources  (assets) 
Machinery 

Less  reserve  for  depreciation 
Small  tools 

Office  furniture  and  fixtures 
Store  fixtures 
Total  resources 


200 
10200 


6500 
4200 
1750 
1480 
9420 


17500 
550 


29000 
1500 


500 
500 


Illustration  108 


nHAL  TBIAL  BALAITCE,  DECEMBER  31,  19 


THE  TODD  MFG.  CO: 


Cash  -  per  C.  B. 

Cash  -  petty 

Materials 

Materials  In  Process 

Productive  Labor 

Manufacturing  Expense 

Finished  Goods 

Accounts  Receivable 

Machinery 

Small  Tools 

Office  Furniture  &  Pirturfls 

Store  Fixtures 

Accrued  Taxes 

Accrued  Pay-roll 

Accotmts  Payable 

Surplus 

Reserve  for  Uncollectable  Acoounts 

(contra  in  admr.  ex.  a/c) 
Reserve  for  Depreciation  on  Machinery,  etc. 

(contra  in  Mfg.  Exp.  4  Factory  Exp.) 


Capital  Stock    Preferred 

Capital  Stock      Comnon 

Cost  of  Sales 

Sales 

Selling  Expense 

Administrative  Expense 


250  shares  at  $100 
250    "    "100 


10200 

200 

8500 

420C 

1750 

1460 

9420 

17500 

29000 

1800 

500 

500 


894CC 


500C 
410C 


183550 


10400 


25350 
17150 


52900 


27500 
1800 


1000 


83200 


100 
1200 
6000 
6200 

350 

1500 
25000 
25000 

116200 


18355C 


769.  The  final  trial  balance,  taken  from  a  set  of  books  in  which  the  manu- 
facturing accounts  are  kept  by  the  cost  method  (^689),  is  shown  in  illustration 
108.  The  amounts  were  made  up  from  exactly  the  same  transactions  that 
entered  into  the  accounts  shown  in  the  trial  balance  in  illustration  103.  It  will 
be  noted  that  the  trial  balance  under  the  cost  method  is  considerably  shorter,  and 
that  the  balances  shown  by  the  manufacturing  accounts  differ  from   those 


MANUFACTURING   STATEMENTS 


247 


THE  TODD  MAITUFACTOBIKG  CO.  ,  PITTSBURG,  PA. 


Aocrued  taxes,  -  estloatad 

Acomed  labor 

Acoounts  payable 

Total  current  llabilltleB 

Dividends  declared 

Preferred  stock,  $25000,  at  7% 

Common      "     25000,  "  10^ 
Total  liabilities 
Capital  stock  issued 

Preferred 

Cofflfflon 
General  Profit  arid  Loss  aoco\int 

Surplus,  Jan.   1,   19     , 
Deo.   31,   19     , 


1750 
2500 


25000 
25000 


6200 
13450 


IOC 
1200 
6CO0 


730C 


4250 


11550 


50OO0 


21650 


63200 


showTi  in  the  trial  balance  under  the  department  method.  When  both  methods 
are  thoroughly  understood,  however,  it  is  not  difficult  to  reconcib  the  manufac- 
turing accounts  of  one  trial  balance  with  those  of  the  other,  as  is  explamed  in 
1[771.  It  should  also  be  noted  that  while  the  balances  of  the  materials,  materials 
in  process,  productive  labor,  manufacturing  expense,  and  finished  goods 
accounts  in  illustration  108  show  the  inventory  value  of  those  accounts  at  the 
close  of  the  present  fiscal  period,  the  balances  shown  by  similar  accounts  in 
illustration  103,  under  the  department  method  of  accounts,  show  the  inventory 
values  at  the  close  of  the  last  preceding  fiscal  period. 

770.  An  interesting  exhibit  of  the  manufacturing  accounts  under  the  cost 
method  may  be  had  by  opening  each  account  with  the  inventories  shown  in  the 
trial  balance,  illustration  103,  and  posting  the  journal  entries,  shown  in  illustration 
109,  which  represent  in  totals  the  entries  made  during  the  year  in  the  various  cost 
journals.  It  will  be  seen  that  the  balances  shown  by  these  accounts  at  the  close 
of  the  period  agree  with  the  balances  shown  in  trial  balance,  illustration  108. 


Analysis  Showing  Agreement  of  Manufacturing  Accounts  in  Trial 
Balance,  Illustration  108,  with  Similar  Accounts  in  Trial  Balance, 
Illustration  103. 

771 .  This  analysis  explains  the  essential  differences  between  the  cost  and 
the  department  methods  of  accounts.  It  shows  also  that  while  the  results  are 
different  in  each  corresponding  account,  they  are,  in  fact,  harnaonious,  each  being 
correct  under  the  method  employed  for  keeping  it. 


248 


BOOKKEEPING   AND   ACCOUNTANCY 


Illustration  109 

SERIES  OF  EUTPIES  SHOVTIKG  AGGREGATE  AITOUKTS  DEBITED  AUD  CEEDITED 
Po».  MARUFACTUEING  ACCOUin'3  FOR  THE  YEAP,    EEri  TH3  COST  KSTHOD. 


TO 


747 


748 


749 


750 


751 


Ifaterlals 

•    Accounts  Payable 

Materials  In  Process 
Materials 

Materials 

Materials  in  Process 

Productive  Labor 
Cash 

Manufacturing  Expenses 
Factory  Expenses 

Finished  Goods 

liaterlals  in  Process 
Productive  Labor 
Manufacturing  E:q)ense 

Cost  of  Sales 

Finished  Goods 


Purchases 
Pequisltions 
Eetumed  to  stores 
Pay-roll  fron  cash  book 


Estimate  for  jrear,  per 
general  journal 


General  journal 


53000 
50600 
2300 
34000 
12000 
91820 

89400 


Illustration  110 


M^:Z^^^y:iAi 


53000 


50600 


2300 


34000 


12000 


46800 
33650 
11370 


89400 


f9 


yhyj^ 

^17 


^(2/^-S7-€r^c£<fr.,tn^ 


^S'o  c 


^S 


Akaoi^'A-cZi'az^^  yArr, 


?y/V 


kS7)6o  o 


^JL 


"^cA^^J^ 


vy, 


V^^efc-t/ 


M. 


f^al<A'v»cje.-^^Art/v\to 


JVM 


.'?>P".0  Q 


.^/ 


(%ayO  /yia£e.^voaAi 


^  <?  /  oo 


\S^>  QG 


Qa^y 


^OJ/  Art>^   /V^rr^r^^ 


fS'^iTon 


(a)  Materials  account.  This  account,  illustration  110,  is  debited,  first, 
with  the  balance  brought  do^vn  from  the  last  preceding  fiscal  period,  December 
31,  $3800.  This  amount  corresponds  with  the  amount  shown  as  the  inventory 
of  materials  and  supplies  in  trial  balance,  illustration  103.  The  materials 
account  is  then  charged  with  the  materials  purchased  for  the  period,  $53000 
(5[705a),  and  with  the  materials  returned  from  work  in  process,  $2300.  (^7056) 
It  is  credited  with  the  amount  of  material  requisitioned  for  work  in  process 
during  the  period,  $50600  (^706c),  the  balance  of  the  account,  $8500,  being  the 
amount  shown  on  trial  balance,  illustratiop  10^      (^707) 


MANUFACTURING    STATEMENTS 


24S 


Illustration  111 


myOlM^^Zo  <=h?j(^y(77Xdjy 


-I 


1/2:201 


^ 


.?  /  I  y7^y2^:<^^<^,^Z£<^^  v^-7^. ', 


^Cz£;.Srt^  c£^:rvin^l 


Si-y  ory 


v^g  Coo 


im 


JLZ. 


>^±. 


My/ft ,  A^xz^y,^,^// 


<^^2ft^^y^.e.c^/^crr/r^ 


J1300 


^ /',>!?  Oft 


-RjJrp-^X 


r?)aJ?/Ouwcit-^/YunAAtflTbi 


_lLJLM 


\55<?oo 


S3S06 


//>ryJ^y^r-Tri'£)UrZfrt^ 


U-20O 


(b)  Materials  in  process  account.  The  balance  in  this  account,  $2700, 
illustration  111,  agrees  with  the  item  for  that  account  in  trial  balance,  illustration 
103.  It  is  then  charged  with  all  goods  requisitioned  from  the  materials  account 
for  the  period.  (^71  la)  The  account  is  credited  for  any  materials  returned 
to  the  store-room  and  charged  back  to  the  materials  account  (7126),  and  for  the 
amount  of  material  used  in  finished  orders,  jobs  or  contracts,  at  cost.  (712c) 
The  balance  of  the  account  shows  the  cost  of  the  material  in  the  uncompleted 
work  in  process,  $4200,  being  the  amount  shown  on  trial  balance,  illustration  108. 
(!i713) 


Illustbation  112 


(^^.r/r/y./W^y/rJfmJm/ 


/da£<.ySrvi^C^,n.(n^y 


/^^oo 


y'yCyf^U^<i'A..^^i^^t 


'<?^e^^?^ 


^36K^a 


.■d/  (^^^~Ay>^J'y^^^A/ 


3'-/'aoo 


rpi.<^ 


ii. 


CJU-VArx/viJjyvt^ 


\  \5  C 


/ 


/^a//Arrr^  c^^rvvT^ 


/  7'S-O 


(c)  Productive  labor.  The  balance  brought  down  in  this  account  is  $1400, 
agreeing  with  the  inventory  of  labor  in  process  in  trial  balance,  illustration  103. 
The  account  is  then  charged  with  direct  labor  for  the  period  (^716a),  and  is 
credited  with  the  direct  labor  expended  in  goods  manufactured  for  the  period 
(117176),  the  balance  of  the  account,  $1750,  agreeing  with  trial  balance,  illus- 
tration 108.     (11718) 

[liLTJSTRATION   113 


M7/?^y/^/7^^^^^^  ^^fyyj^^^y 


250 


BOOKKEEPING  AND   ACCOUNTANCY 


(d)  Manufacturing  expense.  On  trial  balance,  illustration  103,  $850  is 
shown  as  the  amount  of  the  inventory  for  this  account,  brought  down  from  the 
previous  period,  which  agrees  with  illustration  113.  It  is  then  charged  with 
the  estimated  manufacturing  expenses,  $12000.  (1|721a,  b)  It  is  credited  for 
the  expenses  distributed  in  the  goods  manufactured  (^722c),  the  balance,  $1480, 
agreeing  with  the  item  in  trial  balance,  illustration  108.     (^723) 

Illustration  114 


m^^AA/y//  ^,/7Pl/jy 


^ 


/?!K7j'^^rifi^c/.^r-^tr>^ 


-7^ 


c/M^(^^^J- 


&CH^^^a/t^/i^^4. : 


S<?'/^c 


M 


'ZZZ. 


±L 


i/?Mc/rX^<yi.t^^yy/. 


afgi-G 


^ 


ii 


(vtoCaM/ec-- ivun^.Ai-yr>i 


<^"^' 


(v8g^o 


^gF.2-<) 


-^ 


/^r/^Arrrf'  c/^,t'->^ 


ryq^^o 


(e)  Finished  goods  account  shows  a  balance  brought  down  of  $7000, 
corresponding  with  the  inventory  in  trial  balance,  illustration  103.  It  is  charged 
with  S91820,  the  cost  of  the  goods  manufactured  during  the  period.  (^741a) 
It  is  credited  for  the  cost  of  the  goods  sold  during  the  period,  $89400  (*[[7426), 
the  balance  of  the  account,  $9420,  agreeing  with  trial  balance,,  illustration  108. 
(11743) 

772.  A  careful  study  of  these  ledger  accounts  and  the  references  given, 
will  show  that  all  the  elements  of  cost  included  in  the  manufacturing  statement, 
made  up  from  the  manufacturing  accounts  kept  by  the  department  method, 
illustration  103,  have  been  included,  proven  and  disposed  of  in  the  manufacturing 
accounts  kept  by  the  cost  method,  the  final  results  being  shown  in  the  balances 
of  the  accounts  and  in  the  debit  of  $91820  to  finished  goods  account,  the  connect- 
ing item  between  the  group  of  manufacturing  accounts  and  the  group  of  selling 
accounts  being  the  cost  of  the  goods  sold,  $89400,  which  is  the  total  credit  to 
finished  goods  account  for  the  period. 

773.  Manufacturing  statement — cost  method  of  accounts.  When  the 
manufacturing  accounts  are  kept  by  the  cost  method,  the  manufacturing  state- 
ment shown  in  illustration  104  may  be  prepared,  but  the  accounts  in  the  ledger 
must  be  referred  to  for  part  of  the  information  necessary,  as  follows: 

Part  1. 

(1)  Inventories,  January  1,  19  ,  instead  of  being  taken  from  the  trial 
balance,  illustration  103,  are  found  in  the  inventory  balances  of  the  materials, 
materials  in  process,  and  productive  labor  accounts,  brought  down  from  the 
preceding  fiscal  period,  January  1,  as  s^own  in  the  accounts  in  illustrations 
110-114. 


MANUFACTURING   STATEMENTS  251 

(2)  Purchases  of  materials,  $53000,  is  the  sum  of  the  purchases  for  the 
period  shown  on  the  debit  side  of  the  materials  account,  exclusive  of  the  items 
for  materials  returned  from  work  in  process  and  the  balance  of  the  account  at 
the  beginning  of  the  period.     See  illustration  110. 

(3)  Productive  labor.  $34000,  is  shown  by  the  debit  footing  of  productive 
labor  account,  exclusive  of  the  inventory  at  the  beginning  of  the  period. 

(4)  Prime  cost  of  goods  manufactured,  $80450,  is  the  sum  of  the  credit 
footing  of  materials  in  process  account  less  items  of  materials  returned  to  stock- 
room, $46800,  and  the  credit  footing  of  productive  labor  account,  $33650. 

(5)  Inventories,  December  SI,  19  ,  are  shown  by  the  balances  of  the  materi- 
als, materials  in  process,  and  productive  labor  accounts,  as  shown  in  the  trial 
balance,  illustration  108.  These  balances  equal  the  inventory  value,  at  cost 
price  of  the  materials  in  stock,  materials  in  process  of  manufacture,  and  produc- 
tive labor  charged  to  work  in  process.     (Tj  707,  713,  718) 

This  completes  Part  1  of  the  manufacturing  statement,  under  the  cost  method, 
and  the  footings  of  the  two  sides  of  the  statement  must  be  equal,  i.e.,  all  of  the 
costs  charged  on  the  debit  side  of  the  statement  are  accounted  for  on  the  credit 
side  of  the  statement,  the  balances  being  supported  by  inventories,  which  are 
again  proven  by  the  various  subordinate  factory  books  and  journals,  such  as 
the  materials  ledger,  etc. 

Part  2 

(6)  Manufacturing  expenses  during  preceding  period,  the  first  item  on  the 
debit  side  of  Part  2,  is  the  balance  of  the  manufacturing  expense  account  brought 
down  from  the  preceding  fiscal  period,  as  shown  in  that  account  in  illustration  113. 

(7)  Prime  cost  of  goods  manufactured  during  the  period  is  the  amount 
shown  in  item  1  on  the  credit  side  of  Part  1  of  the  statement,  brought  down. 
(See  H  773  (5)  ). 

(8)  Manufacturing  expenses  for  the  period  are  shown  by  the  debit  footing 
of  manufacturing  expense  account,  exclusive  of  the  inventory  of  the  preceding 
period,  brought  down  January  1. 

(9)  Manufacturing  expenses,  the  first  item  on  the  credit  side  of  Part  2,  is 
the  inventory  value  of  these  expenses  at  the  close  of  the  present  fiscal  period, 
shown  by  the  balance  of  manufacturing  expense  account.     (H  723) 

dO)  The  production  cost  of  goods  manufactured  during  the  period  $91820 
is  the  debit  footing  of  finished  goods  account,  exclusive  of  the  balance  of  the 
account  for  the  preceding  fiscal  period,  brought  down  January  1.  It  is  the 
amount  charged  to  finished  goods  account  during  the  period  from  the  finished 
goods  journal  and  equals  the  sum  of  the  credits  to  materials  in  process  ($46800), 
productive  labor  ($33650),  and  manufacturing  expenses  ($11370).  (1[712c,  7176, 
722c) 


252 


BOOKKEEPING   AND    ACCOUNTANCY 


774.  Manufacturing  accounts,  under  the  cost  method,  are  self-proving.  On 
the  debit  side  they  show  the  costs  of  material,  labor  and  manufacturing  expenses; 
on  the  credit  side  they  show  the  disposition  of  these  costs  through  the  various 
manufacturing  processes  until  the  final  result,  shown  in  the  total  cost  of  produc- 
tion, is  reached,  for  which  finished  goods  account  is  debited.  (1[741a)  The 
balance  shown  by  each  account  is  also  self-proving,  as  it  must  agree  with  the 
inventories  and  the  results  shown  by  the  various  supplementary  cost  books  and 
records,  such  as  the  materials  and  stock  ledgers,  cost  cards,  sheets,  and  summa- 
ries. For  this  reason,  the  manufacturing  statement  is  frequently  omitted,  the 
"cost  of  merchandise  sold"  being  the  connecting  item  between  the  manufactur- 
ing and  the  trading  accounts,  as  shown  in  illustration  114.  It  will  be  noticed 
that  the  trading  and  profit  and  loss  statement,  illustration  115,  is  in  report  form. 
It  may  be  prepared  in  the  standard  form,  as  shown  in  illustrations  105,  106. 


Illustbation  115 


TPuADITO  AND  PROFIT  &  LOSS  STATEMEHT,   DECEMBEE  31,   19 


Gross  Sales 

Less  returns,  allowances  &  dlacoiints 
Ket  Sales 

Less  cost  of  merchandise  sold 
Gross  trading  profit   for  period 
Less  Selling  expenses,  viz.. 

Freight  outward 

Coinnlssions 

Saleemen'B  salaries 

Wages  shippers  and  pactors 

Insurance  on  stock 

Traveling  expenses 

Supplies 

Advertising 

Gas,   fuel  and  light 

Bent 

Storage   (outside  warehouae) 

Depreciation  on  Fixtures 
Net  Trading  profit  for  period 
Administrative  expenses,  - 

Bent   (proportion) 

Insurance  on  fixturea 

Taxes   (proportion) 

Int.   on  tenp.   loan 

Officers*   salaries 

Salaries  of  office  clerks 

Audit  fee 

Stationery  &   office  supplies 

Gas,  fuel  and  lighting  (proportion) 

Repairs  -  office  fixtures 

Uncolloctable  accounts  (Charge  for  contra  to  reserve) 

Depreciation  on  firturoa 
Eet  profit  for  period 
Dividend  declared,  - 

Preferred  stock,  $25000,  at  7% 

Common      "     25000,  "  lOjS 
Balance  to  Surplus  a/c 


116500 
300 


100 

200 

2500 

600 

50 
1230 

50 
100 

10 
100 

50 

10 


100 

18 

£0 

30 

2000 

1000 

200 
50 

100 
60 

400 
92 


1750 
2500 


116200 

89400 


26800 


5000 


21800 


4100 


17700 


4250 


MANUFACTURING   STATEMENTS 


253 


775 .  A  statement  of  manufacturing  operations  may  be  prepared  to  accom- 
pany the  preceding  trading  and  profit  and  loss  statement,  if  desired.  By  refer- 
ring to  the  ledger  accounts,  illustrations  110-114,  it  will  be  seen  that  this  state- 
ment is  nothing  more  than  a  statement  in  report  form  of  the  facts  shown  by 
those  accounts. 


Illustration  116 


j'l'ATSJJSOT  OF  MAITOFACTDRIiro  OFERATIOHS  F9B  TRATi  EirPIlTO  lECEIIBEB  31,  19 . 

THE  TODD  MFG.   CO..   PITTSBUBG.   PA. 


UATEHALS  a/c 

Inventory  and  supplies,  Jan.  1,  19     , 

Purchases  during  period 

Materials  requisitioned  for  work  in  process 
Less  materials  returned  to  stock 

Cost  of  materials  transferred  to  work  in 

process,  during  period 
Balance  a/c  -  l^terials  on  band,  per  inventory 

MATEEIALS  IN  PE0CE33  a/c 

Inventory  materials  in  prooeBS  partly  manu- 
factured, Jan.  1,  19     , 

Materials  requisitioned  during  period,  less 
returns 

teas  Cost  of  materials  in  the  completed  product 
of  the  period 

Balance  a/c  -  Eaterials  in  process  at  close  of 
the  period 

PRODUCTIVE  UBOR  a/c 

Inventory  of  labor  on  materials-  In  process, 

partly  manufactured  Jan.   1,  19     , 

Labor  on  completed  and  partly  manufactured 

goods  for  the  period 
Less  Labor  expended  on  completed  goods 
Balance  a/c  -  Labor  on  uncompleted  work  In 

process,  at  close  of  period 

UajTOFACTORIUG  EXEEKSE  a/C 

Inventory  of  ezjxsnses  on  goods  in  process, 

partly  manufactured  Jan.   1,  19     , 

Uaaufacturing  eirpenses  for  period 
Lass  Mfg.   expenses  charged  to  completed  goods 
Balance  a/c  -  Expenses  on  uncompleted  work  is 

process,  at  close  of  period 

PIHISHED  GOODS  a/C 

Inventory,  Jan.  1,  19     , 

Cost  of  goods  manufactured ^during  period 

Matorials  46800 

,   Labor  33650 

Mfg.   Expenses     11370 
Less  -  Coaft  of  goods  sold  during  tha  period, 

carried  to  trading  statement 
Balance  -  Inventory  on  hand  Dec.   31,  19     » 


3800 
530C0 


50600 
2300 


2700 
48300 


1400 
34000 


850 
12000 


7000 
91620 


56800 


48300 


8500 


51000 
46800 


4200 


35400 
35650 


1750 


12850 

11370 


1480 


98820 


89400 


9420 


254  bookkeeping  and  accountancy 

Forms  of  Cost  Records,  Reports,  Books,  Accounts,  Statements,  Etc. 

776 .  These  forms  may  be  designed  in  great  variety,  and  for  many  purposes. 
Those  shown  in  the  following  illustrations  are  general  in  character,  and  are 
intended  to  offer  suggestions  for  forms  that  could  be  used  for  the  purposes  named, 
tather  than  to  be  considered  as  exact  models,  since  they  would  likely  have  to  be 
changed  considerably,  in  size  and  descriptive  matter,  to  meet  the  requirements  of 
a  particular  cost  system.  The  various  journals  receiving  entries  from  these  forms 
are  frequently  ruled  to  correspond.  Such  of  the  forms  as  can  be  conveniently 
printed  and  made  out  in  copying  ink,  may  be  copied  in  the  appropriate  journals 
made  up  of  copy  paper,  from  which  abstracts,  or  recapitulations,  may  be  made 
up  at  the  close  of  each  month. 

Il^l.n«»TBATION  117 


OTHER 

Date 19_.       Ko. 

Make  f  o  r Addres  s 

Date  Wanted Date   Conpleted 


Here  follows  description  of  article,  with  instractions,  drawings,  etc. 


Material  Keg.  ITo. Eouted  by. 


Pat  In  process Shop  order  Ho. 


Illustration  117.  This  is  a  suggestion  for  the  form  of  an  order,  issued  by  the  office  to  the 
superintendent  of  the  factory  or  works  for  the  making  of  a  certain  article  or  goods.  It  is  usu- 
ally accompanied  by  a  requisition  for  the  materials,  and  not  infrequently  by  drawings,  blue- 
prints, detailed  instructions  and,  where  works  are  thoroughly  organized,  by  a  routine,  or  pro- 
cess sheet,  indicatingexactly,  in  detail,  the  various  processes  to  be  followed  and  the  productive 
factors  to  be  employed,  from  the  time  the  order  is  received  in  the  works  until  the  finished  goods 
are  completed. 

Illustration  118.  This  is  a  suggestion  for  a  requisition  blank,  which  is  made  out  in  the 
©ffice,  usually  in  triplicate,  one  copy  going  to  the  store,  or  stock-keeper,  another  following  the 
goods  to  the  work-shop,  the  third  being  retained  in  the  office,  where  it  is  entered  in  the  requisi- 
tion journal.     (^.  748) 


MAMOFACTURING   STATEMENTS 


255 


Illustbation  118 


Req.  No. 

REQUISITION  FORM. 

Date 

Storekeeper  -  Delivery  accormt  of 

Order 
Number 

Stock 
Number 

Quantity 

Particulara 

Coot 

Amount 

-^~.^~^--^~' 

_^ 

— _          .  . 

Delivered  by  

Received  above 


Signed. 


Ent'd  Mat.   Stock  Ledg. ,  page 

Order  charged.   Cost  Bee.  

Ent'd  Req.   Journal,  page 


Illtjstration  119 

MATERIALS  RETURNED. 
Return  KTo. 

Tftte 

Storolceeper  -  Credit   returned  material  accoimt  of- 

Order 

I'umber 

Stock 

Kunber 

Quantity 

Particulars 

Cost 

Amount 

_~~-^-^_— ^___-— — . 



— •^--«— ~-_-^_ 

Storekeeper  receipt 

Returned  by  

Ent.  Raw  Kat.  Stock  Ledg. 
Order  credited,  Cost  Rec. 
Ent.  Trans.  In.  Jour.,  page. 


Signed 


page. 


Illustration  119.  This  is  a  suggestion  for  a  blank  which  is  made  out  when  materials  r.re 
returned  from  the  work-shop  to  the  stock-room.  It  is  entered  in  the  transfer  inward  journal. 
(H.  749)  The  items  atid  the  amounts  in  this,  as  well  as  in  the  requisition  form,  shown  above, 
are  entered  in  the  stock  ledger. 

Illustration  120  shows  the  form  of  a  stock  card,  where  the  card  system  is  used,  or  the 
rulings  of  a  materials  ledger.  Not  infrequently  the  ordinary  form  of  ledger  is  used.  Many 
prefer  the  loose-leaf  form  of  ledger  for  this  purpose. 


256 

Illustration  120 


BOOKKEEPING  AND  ACCOUNTANCY 


STOCK  CABD 

ClasB 

ifica 

t-.lnn   TTn. 

Raw  Material 

Kinin 
Locat 

Artl 

-In 

mm 
ion 

Received 

Delivered 

Balance                        | 

Date 

Sheet 
Ko. 

Quantity 

Price 

^otmt 

Date 

Sheet 
Ho. 

Quantity- 

Price 

ifflount 

rate 

Quantity 

Price 

Anount 

Illustration  121 


MILY  TIMS  TICKET 
Dopartment 


Date. 


name. 


Occupation. 


Clock  Ko. 
Room  


Order  Ko. 


Kind 


Operation 


Quantity         Time         Bate         Amount 


Quantity  0.    K. 


Price  0.   K. 


Amoxmt  0.   K. 


Tlldstration  122 


Machine  Ko. 

Article 

Time  begvm . 
Total  time. 
Chg'd  by 


MACHIKS  TIME  TICKET 
Operator  _ 


Finished. 


E'rly  rate. 


Amt.  $. 


Cost  sheet  Ko. 


Detail 


Eate 


Operation 


Bemarks 


No.   fars. 


Illustrations  121  and  122.  These  are  simple  forms,  which  explain  themselves.  The 
Waily  time  ticket  shows  the  time  of  the  workman  for  the  day.  It  may  be  made  in  the 
rorm  of  a  weekly  time  statement.  The  machine  time  ticket  is  used  to  record  the  daily  work 
performed  by  each  machine,  and  should  check  against  the  order  or  job  cards  following  each 
article  through  the  factory.    The  pay-roll  is  made  up  from  the  daily  time  tickets. 


THE    VOUCHER    SYSTEM 


267 


Illustration  123 


COST  SHEET 


Cost  of 


For. 


Address. 


Order  Ho.. 


.  rate  Issued . 


. Comploted . 


. Billed . 


Materials 


Prod-uctive  Labor 


Mamifactui  Ing  Ezpenses 


iBte 


Peg. 
Ho. 


Quantity 


Amoimt 


Eate 


Ticket 
Ho. 


Ho.  hr'B 


Amoiait 


lector 
No. 


Time 


Pate 


AmoTint 


1 — r 


m 


SrSffllAPT 


Coot 

Estimated 

Increase 

Decrease 

How  Accounted  For 

Hate rial 3 
Productive  Labor 
Ufg.  Earpensea 
Total  Fac.  Cost 
Selling  Exp. 
Profit 
Selling  Price 

Correct 

Ezamined 

Supt. 
Approved 

Uer. 

Illustraiion  123.  Cost  sheets  are  usually  kept  in  the  office,  but  a  cost  card,  ruled  like 
the  form  of  the  cost  sheet  shown  above  the  summary,  usually  follows  each  order,  j  ob  or  contract 
through  the  factory.  This  job  card^  as  it  is  usually  called,  is  sent  to  the  office  daily,  and  it  is 
from  this  card  that  the  cost  sheet  is  made  up.  Whenboundthey  are  called  job  ledgers.  When 
the  work  is  completed,  the  summary  is  filled  out  and  proper  entries  are  made  in  the  finished 
goods  journal  (^i750),  which  completes  the  record  of  the  manufacturing  proeess.  The  illus- 
tration shows  only  one  of  many  different  forms  of  cost  sheets  and  of  j  ob  cards,  which  vary  accord- 
ing to  the  requirements  of  the  shop  in  which  they  are  used.  Frequently  they  are  bound  in 
loose  leaf  ledger  form. 

It  should  be  noted  that  in  all  the  illustrations  of  forms,  no  attempt  has  been  made  to 
show  the  proper  width  of  columns  or  maintain  uniformity  in  the  spaces,  that  being  determined 
in  the  forms  by  the  size  of  the  headings. 


THE  VOUCHER  SYSTEM 


777.  This  is  a  name  given  to  a  method  of  recording  purchase  transao- 
tions,  whereby  a  separate  account  witli  each  person  from  whom  a  purchase  is 
made  becomes  unnecessary,  the  aggregate  total  of  such  accounts  being  carried  in 
an  accounts  payable,  or  vouchers  payable,  account,  which  in  every  particular  corre- 
sponds with  the  accounts  payable  account  described  in  ^50,  illustration  9. 


258 

iLLUSTiaATION  124 


BOOKKEEPING  AND  ACCOUNTANCY 


VOUCHSK 


Sate 

Vo.  ro. 

Kane 

Address 

Productive 

Selling  Expense             | 

Materials 

Dr. 

Labor 

Dr. 

Advertising 
Dr. 

Otlier  Expense 

Dr. 

778.  The  advantages  of  the  voucher  system  are  so  many  that  it  has  been 
adapted  to  meet  the  requirements  of  all  lines  of  business.  It  is  particularly  use- 
ful in  distributing  costs  in  department  accounts,  cost  accounts,  supplementary 
expense  accounts,  and,  in  fact,  all  classes  of  accounts  where  considerable  detail 
is  desired.  It  may  be  used  with  almost  equal  facility  whether  a  cash  or  credit 
business  is  conducted. 

779.  A  voucher,  in  the  ordinary  business  sense,  is  a  name  that  is  applied 
to  any  approved  paper  or  document  which  is  accepted  as  a  truthful  exhibit  of 
business  transactions,  such  as  receipts,  paid  notes,  acceptances  and  checks,  certi- 
fied bnis,  invoices,  etc.  A  voucher  is  also  termed  a  "warranty  of  title."  As 
applied  to  the  voucher  system  of  accounts,  it  refers  to  a  printed  form  attached  to 
or  relating  to  bills  purchased,  which  contains  a  statement  certifying  to  the  cor- 
rectness of  the  bills  and  the  purpose  for  which  the  amount  called  for  in  the  voucher 
is  contracted. 


iLLrSTRATION    125 


Todd  m 

inafi 

loturing  Co., 

To_ 

Pittsburg,  Pa. ,_ 

19 

Dato 

Deaoription 

Amovnt 

^ — '    ^ — 

■>./*— 'V^-v^^-V^./^--- 

i 

^■~~— -^_--->J 

Approved 


Pres.   Examined. 


Mgr. 


THE  VOUCHER  SYSTEM 


259 


REGISTEH 


Administration 
Ezponm 

iia^u.  &  Too  la 

Totichere 

Pay. 

Stmdry  Accts.       Dr. 

When 

&  How 

Paid 

Dr. 

Dr. 

Aoct.     Cr. 

ABt. 

Nanio  of  aoct. 

iBte 

Ck.   Ko. 

Aat. 

780.  Vouchers  are  prepared  in  a  great  variety  of  forms.  In  some  forms, 
the  check  issued  in  payment  of  the  voucher  is  included  as  part  of  it,  while  in  other 
forms  the  check  is  omitted  which,  under  ordinary  conditions,  is  preferable,  as 
voucher  accounts  may  be  paid  by  note  or  in  other  ways,  as  well  as  by  check. 

781.  Illustration  125  shows  the  open  voucher  or  "folder"  as  it  is  sometimes 
called.  Illustration  126  shows  the  back  of  the  same  voucher  folded,  with  debit 
accounts  indicated. 


ter. 


Vouchor  TJo. 


Data. 


.19- 


Paid  by 


$- 


MATERIALS  . 


782 .  Vouchers  are  recorded  in  a  vouchers  payable  book,  or  vouchers  regis- 
The  form  of  this  book  varies,  to  conform  with  the  classification  of  accounts 
in  the  general  ledger,  and  usually  contains  a  separate 
column  for  each  account  that  is  likely  to  be  debited, 
with  an  additional  column  to  receive  items  for  which 
a  separate  column  is  not  provided.  Illustration  124 
shows  the  form  of  a  vouchers  payable  book,  designed  to 
receive  the  entries  of  a  manufacturing  business  con- 
ducting a  cost  system  of  accounts,  with  separate  col- 
umns for  the  various  cost  and  expense  accounts  called 
for  in  the  trial  balance  shown  in  illustration  108.  The 
footings  of  these  columns  are  posted  in  the  general  ledg- 
er to  the  debit  of  the  accounts  named,  at  the  end  of 
each  month,  while  the  total  footing  of  the  vouchers  pay- 
able column  is  posted  to  the  credit  of  vouchers  payable 
account.  The  vouchers  payable  account  is  debited  at 
the  end  of  each  month  from  the  cash  book,  notes  paya- 
ble book  or  other  books  receiving  entries  for  payments 
of  vouchers,  in  each  of  which  a  separate  column  should 
be  kept  to  reeeiye  such  items.  The  balance  of  the 
vouchers  payable  account  in  the  general  ledger  shows 
the  balance  owing  on  unpaid  vouchers,  i.e.,  bills  thaC 
have  been  vouchered  and  recorded,  but  not  paid. 


PROD.    LABOR.  . 

SELLiro  EXP: 
Advertising 

ether  Exp. 

ADMIKIS.   EX?._ 

TOOLS  &  UACH. 

OTHER  ACGTS. 


INDEX 


Accepted  Drafts 178 

Accountancy,  defined 1 

Account  Books 186 

Accounting,  Cost,  defined 202 

Account  Sales 184 

Accounts,  defined 3 

Accounts  Payable 15 

Accounts  Receivable 14 

Administration  Expense  Account 88 

Administrators  and  Executors'  Accounts  165 

Advantages  of  a  Cost  System 209 

Agent,  defined 154 

Agents'  Accounts 167 

Analysis  Sheets 147 

Assets,  defined 132 

Bank  Drafts 185 

Bills 182 

Bills  of  Exchange 185 

Bill  of  Lading 185 

Board  of  Directors,  defined 194 

Bonds 31,  164 

Bonus  Accounts 170 

Bookkeeping,  defined 1 

Branch  Store  Accounts 161 

Burden,  defined 204 

Burden,  Distribution  of 213 

Business  Capital 17 

Business  Papers 173 

Capital  Accounts 17 

Capital  Expense  and  Income  Accounts..  104 

Capital  Investment  Accounts 104 

Capital  Stock ^ 193 

Cartage 56 

Cash 37 

Cash  Account 37 

Cash  Book 38,  187 

Cashier's  Check 181 

Certificate  of  Deposit 181 

Certified  Check 180 

Charges  Prepaid 56 

Check 180 


Checking 130 

Closing  the  Books 137 

Closing  Ledger  Accounts  Shown  in  Profit 
and  Loss  Statement  by  Separate 

JournalEntry 123 

Closing  Ledger  Accounts  Shown  in  Trad- 
ing Statement  by  Separate  Journal 

Entry 74 

Closing  Ledger  Accounts  by  Single  Jour- 
nal Entry 143 

Closing  the  Ledger  (See  Journal  Entries 

to  Close) 190 

C.  O.  D.,  defined 166 

C.  O.  D.  Accounts 166 

Collection  and  Exchange  Account 165 

Collection  Sight  Draft 176 

Collection  Time  Draft 177 

Commission,  defined 155 

Commission  Account 160 

Consignee,  defined 154 

Consignor,  defined 154 

Consignment  Accounts 157 

Consignments  and  Shipments 154 

Controlling  Accounts 15,  172 

Copyright  and  Patent  Accounts 171 

Corporations 193 

Corporation  Accounts 196 

Corporations  and  Partnerships,   Differ- 
ence between 195 

Cost  Accounting 202 

Cost,  Elements  of 200 

Cost  Formula 206-208 

Cost  Method  of  Manufacturing  Accounts  223 
Cost  of  Merchandise  Sold  (Cost  of  Sales)     69 

Cost  of  Production,  defined 200-206 

Cost  of  Purchases,  defined 69 

Cost  of  Sales  Account 234 

Cost  Records,  etc..  Forms  of 254 

Cost  System,  Advantages  of 209 

Crediting  Accounts 4 

Creditor,  defined 2 

Creditors'  Capital,  defined 17 

Creditors,  Sundry 164 


262 


INDEX 


Current  Expenses  and  Incomes 81 

Current  Liabilities,  defined. 132,  146 

Current  Resources,  defined 132,  145 

Customers'  Ledger 15 

Days  of  Grace,  defined 179 

Debiting  Accounts 4 

Debit  and  Credit  Items,  Classification  of      5 
Debiting  and  Crediting  Accounts,  Gener- 
al Rule  for 5 

Debtor,  defined 2 

Debtors,  Sundry 164 

Delivery  Equipment  Account 117 

Delivery  Expense  Account 87 

Department  Method  of  Manufacturing 

Accounts 221 

Difference    between    Partnerships    and 

Corporations 195 

Discount,  Interest  and 100 

Distribution  of  Indirect  Expenses 213 

Distribution  of  Manufacturing  Expenses  213 

Distribution  of  Burden 213 

Distribution  of  Undivided  Profits 127 

Dividend  Account 171 

Doubtful  Accounts 172 

Drafts 176-178 

Drayage 56 

Elements  of  Cost 200 

Errors  in  Trial  Balances 190 

Executors  and  Administrators'  Accounts  165 

Expense  Account,  Administrative 88 

Expense  Account,  Delivery 87 

Expense  Accounts,  General 91 

Expense  Account,  Insurance 98 

Expense  Account,  Selling 81 

Expenses  and  Incomes:  Use  and  Service 

Accounts 81 

Expense  and  Income  Accounts  Property  104 
Expense  and  Income  Account,  Real  Es- 
tate    108 

Expenses,  Manufacturing 228 

Express 56 

Factors  Expense  Account 228 

Factory  Expenses 201,  204,  231 

Factory  Expense  Account 232 

Final  Trial  Balance 132,  241,  246 

Finished  Goods  Account 233,  250 

Finished  Goods  Journal 235 


First  Cost  of  Purchases,  defined 46 

Fixed  Liabilities,  defined 146 

Fixed  Resources,  defined 132,  145 

F.  O.  B.,  defined 56 

Forms  of  Cost  Records,  etc 254 

Formula  for  Manufacturing  Statement. .  240 

Franchise  Account 172 

Freight 56 

Freight,    Express,    Drayage,    etc.,    Out- 
going       85 

Freight  In  Account 57 

Freight  Out  Account 85 

Furniture  and  Fixtures  Investment  Ac- 
count    112 

Furniture  and  Fixtures  Repairs  and  Re- 
newals Account 114 

General  Ledger 15 

General  Expense  Account 91 

Goods  Returned 72 

Good-Will  Account 166 

Gross  Sales,  defined 69-71 

Gross  Trading  Profit,  defined 70 

Gross  Trading  Loss,  defined 70 

Indirect  Expenses,  Distribution  of 213 

Insurance  Account 94 

Insurance  Expense  Account 98 

Interest  and  Discount  Account 100 

Inventories 53,  131,132 

Inventory  Account 53 

Invoice 183 

Invoice  Journal 234 

Journal,  The 189 

Journalizing 130 

Journal  Entries  to  Close 
Trading  Accounts  and  Statement.  .74,  143 
Profit  and  Loss  Accounts   and  State- 
ment    123,143 

Labor 201 

Labor  Account 171,  227 

Leasehold  Account 165 

Ledger,  The 3,  189 

Ledger,  Customers 15 

Ledger,  General 15 

Ledger,  Materials 225 

Ledger,  Purchases 15 

Ledger,  Sales 15 

Ledger,  Stock 225 


INDEX 


263 


Ledger,  Stores 225 

Liability,  defined 132 

Liability  Inventories 133 

Manufacturing  Accounts 200-230 

Manufacturing  Accounts,  Cost  Method..  223 
Manufacturing    Accounts,     Department 

Method 221 

Manufacturing  Expenses 201,  228 

Manufacturing  Expenses,  Distribution  of  213 
Manufacturing  Expense  Account.  .  .  228,  249 
Manufacturing  Expense  Estimate  Book.  235 

Manufacturing  Statements 239-253 

Manufacturing  Statement,  Formula  for.   240 

Materials 201 

Materials  Account 225,  248 

Materials  in  Process  Account 226,  249 

Materials  Ledger 225 

Merchandise  Accounts 

Principal  Trading  Accounts 42 

Purchases  Account 43 

Sales  Account 49 

Inventory  Account 53 

Subsidiary  Trading  Accounts 

Freight  In  Account 57 

Warehouse  Labor  Account 60 

Warehouse  Supplies  Account 58 

Purchase  Reb.  and  All.  Account 62 

Sales  Reb.  and  All.  Account 62 

Purchase  Discounts  Account 64 

Sales  Discount  Account 66 

Merchandise  Discounts 63 

Merchandise  Inventory 53 

Shop-Worn  Goods 53 

Goods  out  of  Style  or  Date 53 

Mortgages  Payable 31 

Negotiable  Instruments 25,  179 

Net  Capital,  defined 20 

Net  Cost  of  Purchases,  defined 46,  09 

Net  Insolvency,  defined 20 

Net  Invoice  Price,  defined 46 

Net  Liabilities,  defined 146 

Net  Resources,  defined 146 

Net  Sales,  defined 70 

Net  Returns  from  Sales,  defined 69 

Net  Trading  Loss,  defined 122 

Net  Trading  Profit,  defined 122 

Non-Ledger  Inventories 133 


Note  and  Acceptance  Books 28,  34,  188 

Notes  Payable,  defined 24,  173 

Notes  Receivable,  defined 24,  173 

Notes,  Promissory 173-175 

Notes  Payable  Account 31 

Notes  Receivable  Account 25 

Owner's  Capital,  defined 17 

Ownership  Accounts 16 

Overhead  Expenses,  defined 205 

Overhead  Expenses,  Distribution  of 213 

Partnerships  and  Corporations,   Differ- 
ence between 195 

Patent  and  Copyright  Accounts 170 

Payroll 222,  227 

Personal  Accounts 5 

Ruling  Personal  Accounts 10 

Grouping  Personal  Accounts 14 

Plant  Account 171 

Posting 130 

President,  defined 194 

Prime  Cost  of  Purchases,  defined 46 

Principal  Trading  Accounts 42 

Principles  Involved  in  Profit  and  Loss 

Statement 122 

Principles  Involved  in  Taking  Trial  Bal- 
ance    139 

Principles  Involved  in  Trading  Statement    72 

Production  Cost 200-206 

Production  Factor  or  Center 216 

Productive  Labor  Account 227,  249 

Promissory  Notes 174 

Profit  and  Loss  Accounts 79-118 

Profit  and  Loss  Statements  118-130,  244,  245 

Preparation  of 121 

Principles  Livolved 122 

Comparison  of  Facts 123 

Property  Investment  Accounts 104 

Property  Expense  and  Income  Accounts  104 
Proprietor's  and  Partner's  Capital  Ac- 
counts      17 

Proprietor's  and  Partner's  Personal  Ac- 
counts      22 

Purchases  Account 43 

Purchases  Book 187 

Purchase  Discounts,  defined 64 

Purchase  Discounts  Account 64 

Purchases  Journal 234 


264 


INDEX 


Purchase  Ledger 15 

Purchase  Reb.  and  All.  Account 62 

Purchases  Returned 44,  45,  71 

Real  Estate,  defined 106 

Real  Estate  Expense  and  Income  Account  108 

Real  Estate  Investment  Account 106 

Rebates  and  Allowances 62 

Receipt,  defined 182 

Redemption  Fund  Accounts 168 

Relationship  between  Owner  and  Busi- 
ness      21 

Requisition  Journal 235 

Reserve  Accounts 167 

Resource,  defined 132,  145 

Resource  Inventories 133 

Resources  and  Liabilities,  Statement  of.  145 

Sales  Account 49 

Sales  Book 187 

Sales  Discounts,  defined 66 

Sales  Discounts  Account 66 

Sales  Ledger 15 

Sales  Reb.  and  All.  Account 62 

Sales  Returned 50,  51,71 

Secondary  Liabilities,  defined 17,  146 

Secretary,  defined 194 

Selling  Expense  Accounts 81 

Delivery  Expense  Account 87 

Freight  Out  Account 85 

Sales  E.xpense 82 

Shipping  Invoice 183 

Shipment  Accounts 155 

Shipments  and  Consignments 154 

Sight  Drafts 176 

Sinking  Fund  Accounts 168 

Shop  Expenses 201 

Shop-Worn  Goods 53 

State.ments 131 

American  Form 149-153 

Continental  Form 149-153 

Manufacturing 239-253 

Profit  and  Loss 118-130,  244 

Report  Form 142-145 

Resources  and  Liabilities.  . . .    145,  152,  246 

Trading 69-79,  244 

Trading  and  Profit  and  Loss.  .   142,  150,  252 
Statements  of  Account 1 83 


Stockholders 194 

Stock  Certificate 194 

Stock  Deliveries  Journal 235 

Stock  Ledger 225 

Stocks  and  Bonds 164 

Stores  Ledger 225 

Subscription  Account 197 

Subsidiary  Trading  Accounts 42 

Sundry  Creditors'  Accounts 164 

Sundry  Debtors'  Accounts 161 

Sundry  Liability  Inventories 134-137 

Sundry  Resource  Inventories 134-137 

Taking  Trial  Balances 131 

Term  of  Credit,  defined 1 

Time  Cards  or  Tickets 222,  227 

Total  Cost  of  Purchases,  defined 69 

Trading  Accounts 42 

Trading  Statements 69-79,  244 

Preparation  of 71 

Principles  Involved 72 

Comparison  of  Facts 73 

Trading  and  Profit  and  Loss  Statements 

142,  150 

Transaction,  defined 1 

Completed 1 

Uncompleted 1 

Transfer,  defined 179 

Transfer  Inward  J,Durnal 235 

Transfer  Outward  Journal 235 

Treasurer,  defined 194 

Treasury  Stock,  defined 194 

Treasury  Stock  Account 197 

Trial  Balances..   131,  140,  141,  147,  241,  246 

Undivided  Profits  Account 167 

Undivided  Profits,  Distribution  of 127 

Use  and  Service  Accounts 81 

Value,  defined 1 

Voucher,  defined 185 

Voucher  System 257 

Wage  Systems 212 

Warehouse  Accounts 58 

Warehouse  Labor  Account 60 

Warehouse  Supplies  Account 58 

Work  in  Process,  defined 226 


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